Severn Trent Annual Report 2019

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FY2019 Annual Report · Severn Trent

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Severn Trent Plc
Annual Report and Accounts 2019

Highlights
£1,767.4m

Group turnover
2018: £1,696.4m1

93.37p

Dividend per share
2018: 86.55p

133.4p

Basic earnings per share
from continuing operations
2018: 101.8p1

145.8p

Underlying basic
earnings per share2
2018: 120.5p1

£563.3m

Group profit before
interest and tax
2018: £527.2m1

£573.6m

Group underlying profit
before interest and tax2
2018: £539.8m1

1 Restated for the implementation of IFRS 15, see note 2

to the Group financial statements.

2 Alternative Performance Measures are defined in note 45

to the Group financial statements.

Contents

STRATEGIC REPORT

What we do .................................................................................................................................02
Our business model .................................................................................................................04
Our social purpose ...................................................................................................................06
Chairman’s statement ..............................................................................................................16
Market and industry overview ............................................................................................... 18
Chief Executive’s review ..........................................................................................................21
How we are achieving our strategic objectives ..................................................................24
Environment, Social and Governance – At a Glance .........................................................29
ODIs and KPIs ............................................................................................................................32
Regulated Water and Waste Water .......................................................................................34
Business Services ....................................................................................................................46
Chief Financial Officer’s review .............................................................................................48
Risk management ....................................................................................................................54
Emerging risks ..........................................................................................................................55
Principal risks ...........................................................................................................................56
Brexit statement ........................................................................................................................61
Viability statement ....................................................................................................................62

GOVERNANCE

Chairman’s introduction to governance ..............................................................................64
Board of Directors .................................................................................................................... 66
Executive Committee ...............................................................................................................68
Stakeholder and Shareholder engagement .......................................................................73
Our company purpose and culture .......................................................................................75
Board evaluation .......................................................................................................................77
Nominations Committee report ............................................................................................81
Audit Committee report ..........................................................................................................85
Treasury Committee report ................................................................................................... 93
Corporate Responsibility Committee report ..................................................................... 94
Directors’ remuneration report ............................................................................................97
Directors’ report .....................................................................................................................123
Directors’ Responsibilities Statement ...............................................................................128

GROUP FINANCIAL STATEMENTS

Independent Auditor’s report to the members of Severn Trent Plc ............................129
Consolidated income statement .........................................................................................134
Consolidated statement of comprehensive income ......................................................135
Consolidated statement of changes in equity ..................................................................136
Consolidated balance sheet .................................................................................................137
Consolidated cash flow statement .....................................................................................138
Notes to Group financial statements .................................................................................139

COMPANY FINANCIAL STATEMENTS

Company statement of comprehensive income .............................................................. 195
Company statement of changes in equity .........................................................................196
Company balance sheet ........................................................................................................197
Notes to Company financial statements ...........................................................................198

OTHER INFORMATION

Five year summary .................................................................................................................202
Information for shareholders ..............................................................................................203

Cautionary statement

This document contains statements that are, or may be deemed to be, ‘forward-looking statements’ with
respect to Severn Trent’s financial condition, results of operations and business and certain of Severn Trent’s
plans and objectives with respect to these items. Forward-looking statements are sometimes, but not
always, identified by their use of a date in the future or such words as ‘anticipates’, ‘aims’, ‘due’, ‘could’, ‘may’,
‘will’, ‘would’, ‘should’, ‘expects’, ‘believes’, ‘intends’, ‘plans’, ‘projects’, ‘potential’, ‘reasonably possible’,
‘targets’, ‘goal’ or ‘estimates’ and, in each case, their negative or other variations or comparable terminology.
Any forward-looking statements in this document are based on Severn Trent’s current expectations and,
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 may or may not occur
in the future. Forward-looking statements are not guarantees of future performance and no assurances
can be given that the forward-looking statements in this document will be realised. There are a number of
factors, many of which are beyond Severn Trent’s control, that could cause actual results, performance 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.

Subject to compliance with applicable laws and regulations, Severn Trent does not intend to update these
forward-looking statements and does not undertake any obligation to do so. 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 US absent registration or an applicable exemption
from the registration requirements of the US Securities Act of 1933 (as amended).

Strategic report
Governance
Group financial statements
Company financial statements
Other information

Welcome to the Severn Trent
Annual Report 2019

Our purpose is to serve our communities
and build a lasting water legacy.
This drives our vision to be the most
trusted water company by 2020,
delivering an outstanding customer
experience, best value service and
environmental leadership.

This report highlights the progress we have made over the past year
in achieving that vision through our strategic objectives and absolute
focus on listening to and delivering value for all of our stakeholders.
We’re committed to keeping your water flowing clearly and making
your waste water clean again, so you can carry on enjoying this
precious resource, for generations to come.

Severn Trent Plc Annual Report and Accounts 2019

Strategic report

What we do

We provide clean water and waste water
services and develop renewable energy
solutions through our businesses:

OUR VALUES

REGULATED WATER AND WASTE WATER

Through our Company values
we deliver the commitments
expected of a leading, socially
responsible Company

Our Regulated Water and Waste Water
businesses Severn Trent Water (excluding
Bioresources) and Hafren Dyfrdwy.

WE PUT OUR
CUSTOMERS FIRST

The primary activities we focus on
• Wholesale operations and engineering
• Household customer services

£1,583.1m

WE ARE PASSIONATE
ABOUT WHAT WE DO

About us
We are two of 11 regulated water and
waste water businesses in England and
Wales. We provide high quality services
to more than 4.5 million households and
businesses in the Midlands and Wales.

WE ACT WITH
INTEGRITY

WE PROTECT
OUR ENVIRONMENT

WE ARE INSPIRED
TO CREATE AN
AWESOME COMPANY

Turnover1

£527.0m

Underlying profit before
interest and tax1,2

2.0bn

Litres of drinking water
supplied each day

5,680

Employees3

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

Read more
Page 95

To support understanding of
our policies and standards,
there is programme of
targeted training, including
e-learning modules and
practical training sessions.

Review mechanisms to further support and assess our culture

Our workforce can raise
concerns at work through
their line manager, senior
management and through our
confidential and independent
whistleblowing helpline,
‘Safecall’. All investigations
are carried out independently
with findings being reported
directly to the Audit and
Corporate Responsibility
Committees. The Audit
Committee monitors and
reviews the effectiveness of
the Group’s whistleblowing
arrangements annually
and provides feedback to
the Board.

Reports from the respective
Chairs are provided to the
Board at the outset of every
meeting, with any serious
allegations being directly
reported to the Board.

Our annual employee
engagement survey, ‘QUEST’,
provides data in a clear
and comprehensive form,
identifying what’s going well
and where we can improve
across the Group. QUEST is
conducted by an independent
research company to ensure
the results are anonymous
and the results are reported to
the Board.

Dedicated culture discussions
are included at our Employee
Forum, hosted by the
Company and attended by the
Chairman, Non-Executive
Directors and Executive
Directors. This regular Forum
is attended by numerous
employee representatives,
Unions and other stakeholders
to enable the views
throughout the organisation
to be considered at Board
level. Individual Directors
provide feedback at the
Board meetings following
Forum attendance.

Feedback to the Board to deepen its understanding of the Group’s culture

Our established reporting mechanisms for company purpose and culture are essential tools in the
Board’s oversight of cultural matters. All feedback received deepens the Board’s understanding
of the Group’s culture and Board feedback is used to inform future areas of focus and ensure that
local plans are consistent with feedback received.

Severn Trent Plc Annual Report and Accounts 2019

Leadership and Effectiveness
Board evaluation

The effectiveness of the Board
is reviewed at least annually,
and conducted according to the
guidance set out in the Code and FRC
Guidance on Board Effectiveness.
An externally facilitated evaluation
was last conducted by Manchester
Square Partners in 2017/18, with the
next externally facilitated session
scheduled for 2021.

The 2018/19 evaluation was internally
conducted by the Chairman with support
from the Company Secretary through a
series of one-to-one meetings in January
and February 2019. Separate meetings
were held to consider the effectiveness of
the Chief Executive, led by the Chairman,
and of the Chairman, led by the Senior
Independent Director.

Following completion of the evaluation
process, the Board considered the
report’s findings and agreed specific
actions. It was also agreed that six-
monthly reviews on progress against
the report’s recommendations would
be tabled for Board discussion.

Strategic report
Governance
Group financial statements
Company financial statements
Other information

Evaluation Process

Step 1. 2018/19 Process planning
The Company Secretary undertook a detailed review of the Board Effectiveness
evaluation process and made revisions to incorporate recommendations
and areas of focus highlighted in the 2018 Code and FRC Guidance on
Board Effectiveness.

A process for comprehensive one-to-one meetings was developed for the
Board and its Committees, with interview questions structured on the basis of
feedback from the 2017/18 evaluation, including areas for improvement and any
additional observations.

Step 2. One-to-one meetings
Board and Committee members participated in comprehensive one-to-one
meetings with the Company Secretary, with appropriate time provided to allow
detailed discussion to take place.

Step 3. Evaluation and reporting
The Company Secretary compiled the individual responses, including analysis
of themes and proposed actions. A detailed report, setting out the findings of
the evaluation was provided to the Chairman for consideration. The Company
Secretary and Chairman met to discuss the findings, with the resulting report
being tabled to the Nominations Committee and Board in March 2019.

Step 4. Agree actions and monitor progress
The findings of the evaluation exercise were fully considered when making
recommendations in respect of the re-election of individual Directors and
included an assessment of their independence, time commitment and
individual performance.

4
Agree actions
and monitor
progress

1
2018/19
Process
planning

Evaluation
process

Evaluation and
reporting

2
One-to-one
meetings

Severn Trent Plc Annual Report and Accounts 2019

Governance

Leadership and Effectiveness continued
Board evaluation

Evaluation Findings

The evaluation concluded that excellent
progress had been made in respect of
areas for further focus identified in the
2017/18 review as detailed below.

The key theme highlighted in the 2018/19
evaluation was positive Board discussion
dynamics. It was noted that all Directors
fostered a culture of open, constructive
debate, undertaken by a respectful
and cohesive, and appropriately
challenging Board.

The evaluation also concluded that
the Board, its Committee Chairs and
Committees were effective and that
all Directors were considered to have
demonstrated considerable commitment
and time to their roles, well in excess
of that required by the Charter of
Expectations notwithstanding any
other positions held by them outside
of Severn Trent.

Minor areas for further development
of the Board’s effectiveness were as
detailed below.

As part of the evaluation, full
consideration was given to the number
of external positions held by the Non-
Executive Directors. Directors’ other
appointments were reviewed, including
the time commitment required for
each. As a result of this review, the
Nominations Committee did not identify
any instances of overboarding and
confirms that all individual Directors
have sufficient time to commit to their
appointment as a Director of Severn
Trent Plc. The full list of external
appointments held by our Directors can
be found on pages 66 to 67. All of our
Non-Executive Directors are considered
to be independent.

Evaluation findings

Evaluation Action 2017/18

Progress 2018/19

Balance of Debate – continue to
maintain focus on strategic, operational
and reputational priorities as well
as regulatory matters.

Talent Management and Succession
Planning – opportunity to apply more
structure to succession planning and
talent development discussions at the
Nominations Committee and the Board.

Board Composition – opportunity to
increase the ethnic diversity of the
Board in line with the recommendations
of the Parker Review and to appoint
an additional Director with Treasury/
Engineering experience.
Financing – opportunity to spend more
time on this topic during NED induction
given its complexity.

Culture – develop a structured plan to
enable the views, ideas and constructive
challenge throughout the organisation
to be considered at Board level.

Separate, dedicated PR19 meetings were scheduled outside the normal Board and
Committee timetable, to reduce the pressure on the Board agenda and maintain focus
on strategic, operational and reputational priorities.

During the 2018/19 evaluation, the Board noted that PR19 approval and submission had been
particularly well managed and that the use of additional Board Committee meetings and
briefing papers had ensured that this topic had not distracted the Board from considering
other strategic issues and operational performance oversight.
Talent and succession planning have been added as separate standing Nominations
Committee agenda items with a forward Board programme for talent and succession
planning also being developed.

Existing talent and succession planning elements of the Board induction programme were
updated to give new Non-Executive Directors better oversight of the Group’s processes.
Succession planning was considered by the Nominations Committee, and Board, during the
year. This included consideration of the Board’s Diversity Policy and its aims to increase
the ethnic diversity of the Board in line with the recommendations of the Parker Review.

The Board also considered Board succession planning in respect of Directors with more
Treasury and Engineering experience.

Relevant sections of the Board induction materials have been reviewed during the year.

The Board induction programme now includes two additional face-to-face sessions with the
finance team to provide the opportunity to clarify and deepen Director knowledge.
Company purpose and culture continues to be considered by the Board as a separate Board
agenda item. Additional detail can be found on page 75.

The Chairman and Non-Executive Directors will continue to attend our Employee Forum.
This regular Forum is attended by numerous employee representatives, Unions and other
stakeholders to enable the views throughout the organisation to be considered at Board level.
Individual Directors provide feedback at the Board meetings following Forum attendance.

Minor areas for further development of the Board’s effectiveness

Evaluation Action 2018/19

Succession Planning

Balance of Debate

Board Composition

Remit of Board Committees

Opportunity to apply more focus to succession planning, in full consideration of Director
tenure. Read more on succession planning activity following year end on page 84.
The Board noted the excellent chairing of Board discussions despite challenging agendas
during the year. Opportunity to allocate additional time on the Board agenda to engage
personally with presenters and discuss matters more informally.
Opportunity to consider broader diversity and inclusion in terms of the Board’s composition.

Opportunity to review the duties within the respective Committee Terms of Reference
and ensure that Committee meetings have sufficient time allocated to them.

Severn Trent Plc Annual Report and Accounts 2019

Leadership and Effectiveness
Effectiveness

Board Development
and Knowledge

Training and Continuing
Professional Development (‘CPD’)
As well as Board agenda items, training
and CPD sessions in relation to specific
topics of interest were presented to the
Board during the year, as follows:

• Severn Trent Academy;

• Leakage Innovation;

• Birmingham Resilience;

• Customer Bills;

• Wonderful Water Tour (our Educational

Buses). Read more on page 35;

• Impact of Renationalisation;

• Robotics and Artificial Intelligence;

• Company Purpose and Culture; and

• Capital Spend.

The aim of the training sessions is to
continually refresh and expand the
Board’s knowledge and skills. In doing
so, the Directors can contribute to
discussions on technical and regulatory
matters more effectively. The sessions
also serve as an opportunity for the
Board to discuss strategy and risks
with management below Executive
Committee level and gain further
direct insight into our businesses and
management capability.

Strategic report
Governance
Group financial statements
Company financial statements
Other information

Our Regulators
To deepen Board level understanding of
our Regulators, our Chairman and Non-
Executive Directors formally met with
our Regulator, Ofwat, five times during
the year.

Induction programme
We have an established induction
programme in place which can be
tailored to meet the requirements of
individual Directors and includes the
following elements/details:

Informal Board interactions
The Board regularly meets more
informally, in the form of Board dinners,
outside of the scheduled Board meeting
calendar. These sessions are convened
to build and maintain successful
relationships and promote a culture
of openness in Board discussions.
Senior Management and external
stakeholders (including Ofwat and the
Water Forum) are invited to attend
these sessions.

Directors’ resources
An online resource library and CPD
repository is available for use by the
Directors, which is continually reviewed
and updated. The library includes
a Corporate Governance Manual, a
Results Centre and Investor Relations
section and briefings on Board training
session topics. It also contains a further
reading section which covers updates
and guidance on changes to legislation
and corporate governance best practice.
The Directors also have access to
professional development provided
by external bodies and our advisers.
CPD requirements were considered
through individual performance review
meetings between the Chairman and
each Director, as part of the internally
facilitated Board Effectiveness review
in 2018/19.

• Ofwat pre-appointment process;

• Our business and how we are

regulated, including performance;

• Our Non-Regulated Business,

including performance;

• Strategy;

• Key operations and processes

including an immersive, practical
journey through the water and
waste cycles;

• Key stakeholder relationships;

• Customer delivery;

• Capital delivery and commercial;

• How the business is financed and
financial performance including
analyst and investor opinion;

• Our people and how we work, including
health, safety and wellbeing, talent
and succession, Trade Unions and an
overview of our Remuneration Policy;

• Risk and audit, including the Group risk

profile and our approach to risk;

• Face-to-face meetings with key

senior colleagues;

• Directors’ duties; and

• Governance matters and

Group policies.

We continually enhance the Board’s
induction process, in full consideration
of feedback from new appointees and the
Board Effectiveness evaluation.

Severn Trent Plc Annual Report and Accounts 2019

The Board immersed themselves in our
Wonderful Water Tour – our innovative
educational roadshow, inspiring the next
generation.

Governance

Leadership and Effectiveness continued
Effectiveness

Operational and Site Visits
The Board, and individual Directors, undertook three key site visits during the year, to deepen their understanding of the Group’s
operations and further inform the Board’s decision-making in creating sustainable long-term value for the mutual benefit
of stakeholders.

Site

Objectives

Minworth – Thermal
Hydrolysis Plant
(‘THP’)

• Practical demonstration of Health and Safety considerations

on complex operational sites

• Employee expertise
• Overview and demonstration of the sludge treatment process

Lake Vyrnwy
Reservoir and
Visitor Site

and operations

• Overview of THP process and its importance to the Group,

including implementation of technological advances

• Process optimisation across the Minworth site
• Site sampling and performance record
• Environmental
• Practical demonstration of Health and Safety considerations on

publicly accessible sites

• Tour and briefing on educational programmes delivered at the site
• Tour of conservation programmes, including the RSPB Organic Farm

and SSSI site

• Opportunity to interact with employees
• Overview of Lake Vyrnwy’s infrastructure
• Catchment Management activities
• Biodiversity activities

Agrivert

• Practical demonstration of health and safety considerations on

complex operational sites

• Employee expertise and opportunity to interact with employees
• Overview and demonstration of the anaerobic digestion process

and operations, including implementation of technological advances

• Process optimisation across the Agrivert site
• Environmental

Key Board Considerations

• Health and safety
• Employee stakeholders and

People Strategy

• Operational knowledge
• Technology
• Environment

• Customer and community experience
• Environment
• Health and safety
• Employee stakeholders and

People Strategy

• Operational knowledge
• Infrastructure
• Environment
• Biodiversity
• Health and safety
• Employee stakeholders and

People Strategy

• Operational knowledge
• Technology
• Environment

The Board spent time observing anaerobic
digestion processes at our Agrivert site and
were hugely impressed by the engineering
capability and expertise of our people.

Severn Trent Plc Annual Report and Accounts 2019

Nominations Committee report
Leadership & Effectiveness

Strategic report
Governance
Group financial statements
Company financial statements
Other information

Dear Shareholder

I am pleased to introduce this report
which details the role of the Committee
and the important work it has
undertaken during the year. The pages
that follow provide additional detail
on the activities and discussions of
the Committee and share the matters
considered by the Committee and steps
taken to address any actions.

The Committee plays a key role in
supporting the Board within the
Governance Framework in reviewing
the composition of the Board and its
Committees. This includes assessing
whether the balance of skills, experience,
knowledge and independence on the
Board is appropriate to enable it to
operate effectively. The Committee also
assisted the Board in its consideration
of conflicts of interest and independence
issues. No conflicts of interest or
independence issues were identified as
a result of this activity.

Throughout the year, increased focus
continued to be given to the Group’s
succession, contingency planning and
diversity needs. Discussion centred
on the importance of developing,
and maintaining, a diverse range of
perspectives, skills, experiences and
expertise, essential to ensuring our long-
term viability and commercial success.
More information on our diversity
initiatives can be found in the Strategic
report on page 44.

The Committee held four meetings
during the year and has met twice since
the end of the financial year. I would like
to thank the members of the Committee
for the open discussions that take place
at our meetings and the importance they
all attach to its work.

During the year, the Committee has
spent a significant proportion of its
time overseeing the evaluation of the
Board, its Committees and Directors.
We also spent time considering the
development of our talent pipeline
for Directors and high performing
individuals below Board level, with a
focus on the need for diversity. As part of
the Board Effectiveness evaluation, the
Committee evaluated the structure, size,
composition and succession needs of the
Board. Additional detail can be found on
page 77.

As mentioned in my Chairman’s
statement on page 16, I believe this
is the right moment to step down
and allow a new Chair to lead the
Board into the next phase for Severn
Trent. The Committee, led by Senior
Independent Director Kevin Beeston, is
overseeing the process ahead of making
a formal recommendation to the Board.
The Committee is in the initial stages of
succession planning and it is planned
to formally announce my successor in
due course. In line with the provisions of
our Board Diversity Policy, any executive
search firms involved will be signed up to
the voluntary code of conduct on gender
and BAME diversity and best practice.
Kevin Beeston will continue to chair
all meetings of the Committee when it
meets to discuss this matter.

Andrew Duff
Chairman of the
Nominations Committee

Documents available at severntrent.com

Nominations Committee Terms
of Reference
Board Diversity Policy Statement
Group Conflicts of Interest Policy

Chairman’s
message

Andrew Duff
Chairman of the
Nominations Committee

Attendance table

Committee
Member
Andrew Duff
(Chairman)1
John Coghlan2
Dominique
Reiniche2
Kevin Beeston2
Philip Remnant2
Angela Strank2

Meetings
attended
4

Max
possible
4

4
4

4
4
4

4
4

4
4
4

The members of the Committee in
2018/19 were the Non-Executive
Directors of the Board. Only members of
the Committee have the right to attend
Committee meetings. Other individuals
such as the Chief Executive, the
Director of Human Resources, senior
management and external advisers may
be invited to attend meetings as and
when appropriate.

The Committee’s Terms of Reference
were updated in March 2019.

1. Independent on appointment.

2. Independent Non-Executive Director.

Severn Trent Plc Annual Report and Accounts 2019

Governance

Nominations Committee report continued
Leadership & Effectiveness

Key areas of Nominations Committee focus in 2018/19

A summary of the matters considered at each meeting is set out below:

July 2018

• Preparations for the 2018 UK Corporate Governance Code
November 2018

• STEC Succession Planning
January 2019

• NED Tenure Review and Succession Planning
• Workforce Engagement, including individual Director commitments
March 2019

• Board Effectiveness Report 2018/19
• Continuing Office of Directors
• Board Composition and Independence
• Conflicts of Interest: Annual Review
• Diversity and Inclusion Update
April 2019

• Board Succession Planning
May 2019

• Board Succession Planning
• Talent Development and STEC Succession Planning
• Nominations Committee Report within the Annual Report and Accounts

Diversity

As highlighted earlier in the report, the
Board and Nominations Committee
continue to drive the agenda of diversity
across the Group and are proud of the
progress made, especially in respect
of female representation on the Board
and Executive Committee (now at 37.5%
and 36% respectively). A breakdown by
gender of the number of persons who
were Directors of the Company, senior
managers and other employees as at
31 March 2019 is set out below.

The Board remains focused on promoting
broader diversity, and creating an inclusive
culture in line with the recommendations
of the Parker and McGregor-Smith
reviews. A diverse organisation benefits
from differences in skills, regional and
industry experience, background, race,
gender, sexual orientation, religion, belief
and age, as well as culture and personality.

The Board Diversity Policy (the ‘Policy’)
was reviewed by the Committee in
January 2019, with recommended
updates approved by the Board. As part
of Board discussions, recognition was
given to the importance and benefits

of greater diversity, including gender
diversity, social and ethnic background
and cognitive and personal strengths
throughout the organisation, including
on the Board itself. Although no targets
have been set at present, the benefits
that diversity brings to the Board are
wholly recognised by the Committee and
is evidenced through the commitments
made in the Policy.

The objectives of the Policy, and an
update against each of them, are
set out on page 83. A copy of the
Policy Statement is available on the
Severn Trent Plc website.

Gender diversity at 31 March 2019

Severn Trent Board diversity ﬁgures as at 31 March 2019

Strategic Leader and Director

Group

Director gender split

Non-Executive tenure

1.
2.

Male
Female

60.00%
40.00%

Apprentices

1.
2.

Male
Female

70.50%
29.50%

Graduates
1

1.
2.

Male
Female

62.50%
37.50%

2
3
1

1.
2.
3.

1-3 years
4-6 years
6+ years

1.
2.

Male
Female

86.57%
13.43%

1.
2.

Male
Female

60.76%
39.24%

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

Progress against objectives
At its March meeting, the Committee formally
reviewed the composition of the Board and the
performance, contribution and commitment
of individual Directors in the context of the
Board Effectiveness evaluation. No concerns
were raised in relation to the composition of
the Board.

Regular updates in respect of succession
planning fully consider the Board’s
Diversity Policy and its aims to increase
the ethnic diversity of the Board in line with
the recommendations of the Parker and
McGregor-Smith Reviews.

The Board also considered Board succession
planning in respect of Directors with specific
experience in Treasury and Engineering.

No Board appointments were made during
the year, however all recommendations in
respect of future Board appointments will be
conducted in full consideration of the Policy,
2018 Code and additional relevant guidance.

Board Diversity Policy – Objectives and Progress

Policy Objectives

Implementation

Ensure the Board comprises an
appropriate balance of skills, experience
and knowledge required to effectively
oversee and support the management of
the Company.

Annual review of the Board’s composition
by the Nominations Committee each year
with particular consideration being given
to the balance of skills, experience and
independence of the Board.

Board Effectiveness evaluation specifically
considers the composition of the Board
and the contribution, commitment and
independence of individual Directors.

The Board and Nominations Committee
recognise the importance and benefits of
greater diversity including gender diversity,
social and ethnic background and cognitive
and personal strengths, throughout the
organisation, including on the Board itself.

On instruction of an executive search
firm, the specification will ensure that
candidates with no listed company Board
experience are fully considered.

The Company only engages with executive
search firms who have signed up to the
voluntary code of conduct on gender and
BAME diversity and best practice.

Ensure consideration is given to
candidates for Non-Executive Director
Board appointments from a wide pool,
including those with no listed company
Board level experience.

Ensure Board appointment ‘long lists’
include diverse candidates, including
diversity of social and ethnic backgrounds
and cognitive and personal strengths.

Ensure the Board and Nominations
Committee only engage executive search
firms who have signed up to the voluntary
Code of Conduct on gender diversity and
best practice.

Ensure focus is given to the development
of a pipeline of diverse high calibre
candidates for Board level roles.

The Company only engages with executive
search firms who have signed up to the
voluntary code of conduct on gender and
BAME diversity and best practice.

We continue only to engage with executive
search firms who have signed up to the
voluntary code of conduct on gender and
BAME diversity and best practice.

Regular Board and Nominations
Committee consideration of the importance
and benefits of greater diversity including
gender diversity, social and ethnic
background and cognitive and personal
strengths. This includes representation of
these cohorts in the Group’s talent pipeline
and on the Board itself.

At its March meeting, the Nominations
Committee considered Diversity and Inclusion
within the Group. The Board committed to
building on existing graduate, apprentice
and leadership programmes to embed
inclusivity in our succession planning and
talent development work. This included
discussion on strengthening our talent
pipeline, with an enhanced focus on ensuring
appropriate representation from minority
ethnic candidates, as well as other relevant
diverse cohorts.

This was also an area of specific focus within
the Board Succession Planning discussions
that took place during the year.

Severn Trent Plc Annual Report and Accounts 2019

Governance

Nominations Committee report continued
Leadership & Effectiveness

Talent development

We recognise the importance of
developing our people and, as such,
talent management remains a key topic
of discussion. The Group’s five year talent
plan focuses on building technical and
leadership capability, and creating talent
pipelines for the future.

We have a total of 78 graduates in
training, with 43 places offered in
2018. We currently have five entry
programmes for graduates – Business
Leadership, Finance, IS, Engineering and
Project Management. Our placement
programme for undergraduates offers
a range of summer and 12 month
placements across Engineering, Finance
and the Visitor Experience teams.
We filled 23 roles in 2018 with a new
opportunity in the Quantity Surveying
team being offered in 2019.

We currently have 133 apprentices in
training. In 2018, we launched three new
apprenticeship programmes in HR, Legal
and Vehicle Technician. We now have 11
active apprenticeship programmes, and
we expect this to increase to 13 in 2019.

We have been a key partner in the
development and implementation of
the new water industry apprenticeships
standards through the Government’s
Trailblazer initiative. As one of the 13
firms making up the employer group, we
have ensured that Severn Trent has been
at the forefront of its development.

Our innovative delivery model for the
water process technician standard has
allowed us to design a programme that
ensures high quality apprenticeship
training delivered in just 24 months –
significantly faster than any previous
schemes. Elsewhere in the industry
this course would take at least 36 –
48 months to complete.

Succession planning

Kevin Beeston led the discussion on
the process of succession planning
for Andrew Duff, who has been on
the Board since May 2010 and has
been our Chairman since July 2010,
therefore reaching the nine year limit
for Chairs specified in the 2018 Code.
The Committee is in the initial stages of
succession planning and it is planned to
formally announce Andrew’s successor in
due course. In line with the provisions of
our Board Diversity Policy, any executive
search firms involved must be signed up
to the voluntary code of conduct on gender
and BAME diversity and best practice.

The Committee looks forward to
appointing a well-qualified and high
calibre Chair in due course, and does not
believe that it would be in the interests
of shareholders for this to take place
immediately, for the following reasons:

• it would be beneficial for the new Chair
to be able to join the Board and work
alongside Andrew Duff for a period
before they step up to become Chair;

• a search for a high quality candidate
takes time and the Committee does
not want to rush this important search;
and

• in the Committee’s opinion, Andrew

Duff remains a very strong and
effective Chairman, who is independent
of management and provides robust
challenge. The findings of the Board
effectiveness evaluation support
this view.

In the year ahead, the Committee
will focus on ensuring a smooth and
orderly handover and induction, in
conjunction with the Company Secretary.
Kevin Beeston will continue to Chair
all meetings of the Committee when it
meets to discuss this matter.

Director conflicts and
independence

In March 2019, the Committee
conducted its annual review of individual
Director conflict authorisations as
recorded in our Conflicts of Interest
Register. Additionally, the Board and
its Committees consider conflicts of
interest at every meeting, and the Board
reviews the authorisation of any potential
conflicts of interest every six months.

The Conflicts of Interest Register sets
out any actual or potential conflict of
interest situations which a Director
has disclosed to the Board in line with
their statutory duties. When reviewing
conflict authorisations, the Committee
considers any other appointments held
by the Director as well as the findings
of the Board Effectiveness evaluation.
Following the review, the Committee
recommended to the Board that
each conflict authorisation remained
appropriate. There were no new potential
conflict situations during the year.

The independence of our Non-Executive
Directors is formally reviewed annually
by the Nominations Committee,
and as part of the Board evaluation
exercise. The Nominations Committee
and Board consider that there are no
business or other circumstances that
are likely to affect the independence
of any Non-Executive Director and
that all Non-Executive Directors
continue to demonstrate independence.
In accordance with the Code, all the
Directors will retire at this year’s AGM
and submit themselves for re-election
by shareholders. Each of the Non-
Executive Directors seeking re-election
are considered to be independent in
judgment and character.

The Nominations Committee spent time
meeting an engineering apprentice at our
Minworth site.

Severn Trent Plc Annual Report and Accounts 2019

Audit Committee report
Accountability

Chairman’s
message

John Coghlan
Chairman of the Audit Committee

Attendance table

Committee
Member
John Coghlan1
(Chairman)
Philip Remnant2
Kevin Beeston3

Meetings
attended
4

Max
possible
4

4
4

In addition to the attendance set out
above, the Chairman, the CEO, the
CFO, the Head of Internal Audit, the
Group Financial Controller and the
External Auditor normally attend, by
invitation, all meetings of the Committee.
Other members of Senior Management
are also invited to attend as appropriate.

The Committee regularly holds
private discussions with the Head
of Internal Audit and the External
Auditor separately, without Executive
management present. The Committee
Chairman regularly holds separate one-
to-one meetings with the CFO, the Head
of Internal Audit, the External Auditor
and with Committee Members outside
the meetings to better understand any
issues or areas for concern.

The Committee’s Terms of Reference
were updated in March 2019.

Strategic report
Governance
Group financial statements
Company financial statements
Other information

Dear Shareholder

I am pleased to introduce this report
which details the role of the Audit
Committee and the important work it
has completed during this pivotal year
for Severn Trent. The pages that follow
provide more detail on the activities of
the Committee and provides an overview
of the significant issues the Committee
assessed and steps taken to address
any issues.

The Committee has continued to play
a key role within the Governance
Framework in discharging its oversight
responsibilities for the integrity of the
Company’s financial statements and
matters relating to the Group’s system of
internal controls and risk management.
We continue our focus on ensuring
the adequate mitigation of current and
emerging risks faced by the Group.
Additional detail of how we carried out
our risk assessment activities and how
we identify and manage risks can be
found on page 54 of our Strategic report.

The Committee held four scheduled
meetings during the year and has met
once since the end of the financial year.
An additional four Committee meetings
were held during the year, the details of
which are described within this report.
I would like to thank the members of
the Committee, the management team,
Internal Audit and our External Auditor,
Deloitte, for their continued commitment
throughout the year, and for the open
discussions that take place at our
meetings, and for the importance they
all attach to its work.

The Committee’s performance was
assessed as part of the annual Board
effectiveness evaluation. I am pleased to
report that the Committee is regarded
as operating effectively and the Board
takes assurance from the quality of
the Committee’s work. The Board is
satisfied that the Committee members
bring a wide range and depth of financial
and commercial experience across
various industries. All members have
competence relevant to regulated and/or
utilities businesses as well as significant
recent and relevant financial experience.

During the year, the Committee spent
a significant proportion of its time
overseeing the development of PR19
plans for Severn Trent Water and Hafren
Dyfrdwy. Other significant parts of
the Committee’s work this year have
included: Enterprise Risk Management,
consideration of Internal Audit reports;
oversight of the relationship with
the External Auditor; including the
assessment of its ongoing objectivity
and independence; overseeing the
assurance of regulatory returns made
by Severn Trent Water and Hafren
Dyfrdwy; oversight of wholesale charges;
new connections charging; customer
ODI forecast; Company Monitoring
Framework and the Water Resource
Management Plans for both Severn Trent
Water and Hafren Dyfrdwy.

As part of the Committee’s oversight
of regulatory reporting obligations in
respect of Severn Trent Water and Hafren
Dyfrdwy, the Company has reviewed
the effectiveness of its governance
arrangements for these subsidiaries
during the year. Following this review,
modifications to the Audit Committee
meeting structure have been
implemented to facilitate dedicated
Committee focus for Hafren Dyfrdwy
regulatory matters. These arrangements
are assisted through the management
of separate agenda items for Hafren
Dyfrdwy matters, with the Independent
Non-Executive Directors of Hafren
Dyfrdwy being invited to attend all
relevant meetings in respect of Hafren
Dyfrdwy matters. Regular updates on
the regulatory matters considered by
the Audit Committee on behalf of Hafren
Dyfrdwy are also reported at each
meeting of the Hafren Dyfrdwy Board,
with more formal reporting on a six
monthly basis.

John Coghlan
Chairman of the Audit Committee

Documents available at severntrent.com

Audit Committee Terms of Reference
Non-Audit Services Policy

1 Recent and relevant financial experience as a member of the Institute of Chartered Accountants in England

and Wales and John was previously Deputy Chief Executive and Group Finance Director of Exel PLC.

2 Recent and relevant financial experience as a fellow of the Institute of Chartered Accountants in England

and Wales.

3 Recent and relevant financial experience as a fellow of the Chartered Institute of Management Accountants

and Kevin was previously Finance Director at Serco Plc.

Severn Trent Plc Annual Report and Accounts 2019

Governance

Audit Committee report continued
Accountability

Key areas of Audit Committee focus in 2018/19

A summary of the matters considered at each meeting is set out below:

May 2018
• Financial results announcement 2017/18
• Severn Trent Plc Annual Report and Accounts 2017/18
• Severn Trent Water Limited Annual Report and Accounts 2017/18
• Viability Statement and Going Concern
• Deloitte Full Year Audit Report
• Internal Audit update
• Assurance Map update
• PR19 Assurance Plan
• Internal control and risk management effectiveness for Severn Trent Plc and Severn Trent Water
• Whistleblowing update
• Fair, balanced and understandable assurance process: Severn Trent Plc and Severn Trent Water
• Relevant Audit Information process: Severn Trent Plc and Severn Trent Water
June 2018
• Annual Performance Report and Annual Regulatory Compliance Statement for Severn Trent Water
• PR14 Reconciliation for Severn Trent Water and Dee Valley Water Limited (now Hafren Dyfrdwy)
July 2018
• Hafren Dyfrdwy Annual Report and Accounts 2017/18, including Viability Statement and Going Concern
• Hafren Dyfrdwy Enterprise Risk Management Update, including Principal Risks for the Annual Report
• Internal control and risk management effectiveness for Hafren Dyfrdwy
• Whistleblowing update
• Annual Performance Report and Annual Regulatory Compliance Statement for Hafren Dyfrdwy
• PR19 Assurance Plan for Hafren Dyfrdwy
• Fair, balanced and understandable assurance process: Hafren Dyfrdwy
August 2018
• PR19 Plan – Severn Trent Water
• PR19 Plan – Hafren Dyfrdwy
September 20181
• External Audit 2018/19 plan and terms of engagement
• External Audit Review of non-audit fees
• Internal Audit update
• Scheme of Wholesale Charges

• Scheme of Wholesale Charges

• Enterprise Risk Management update
• Whistleblowing update
• Review of effectiveness of Whistleblowing arrangements
November 2018
• Interim financial results 2018/19
• Deloitte Interim Audit Report
• Internal Audit update
• Assurance Map update
• Customer ODI Forecast and Assurance
• Company Monitoring Framework Risk Statement
• General Data Protection Regulation review
• Customer ODI Forecast and Assurance
• Company Monitoring Framework Risk Statement
• Cyber review
• Whistleblowing update
• Material Litigation Report and Legal Compliance Report
January 2019
• Water Resources Management Plan
• New Connections Charging
• Water Resources Management Plan

Scheduled meeting
Financial Reporting

External Audit
Internal Audit

Regulatory
Internal Control and Risk
Management
Governance

Additional meeting
Regulatory

Additional meeting
Financial Reporting
Internal Control and Risk
Management

Regulatory

Governance
Additional meeting
Regulatory

Scheduled meeting
External Audit

Internal Audit
Regulatory – SEVERN TRENT
WATER
Regulatory – HAFREN
DYFRDWY
Internal Control and Risk
Management

Scheduled meeting
Financial Reporting
External Audit
Internal Audit

Regulatory – SEVERN TRENT
WATER

Regulatory – HAFREN
DYFRDWY
Internal Control and Risk
Management
Governance
Additional meeting
Regulatory – SEVERN TRENT
WATER
Regulatory – HAFREN
DYFRDWY

1. Modifications to the Audit Committee meeting structure were implemented in September 2018 to facilitate dedicated Committee focus for Hafren Dyfrdwy

regulatory matters.

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

Scheduled meeting
Financial Reporting

External Audit

Internal Audit

Regulatory – SEVERN TRENT
WATER

Regulatory – HAFREN
DYFRDWY
Internal Control and Risk
Management

Governance

March 2019
• Accounting Policies update
• Viability Statement and Going Concern
• Review of effectiveness of External Auditor
• Review of Non-Audit services
• Internal Audit update
• Assurance Map update
• Internal Audit Plan 2019/20
• Water Resources Market Information
• Process and Timeline for Assuring the 2018/19 Regulatory Reporting Requirements
• WICS Compliance Statement
• General Data Protection Regulation Review
• Board regulatory statements – forward plan
• Water Resources Market Information
• Process and Timeline for Assuring the 2018/19 Regulatory Reporting Requirements
• Enterprise Risk Management update
• Bribery and Fraud Prevention and Detection review
• Whistleblowing update
• Preparations for the 2018 UK Corporate Governance Code
• Audit Committee Terms of Reference
• Material Litigation Report and Legal Compliance Report
• Year End Governance Matters:

– Fair, balanced and understandable assurance process
– Relevant Audit Information process
– Audit Committee report within the Annual Report and Accounts

May 2019
• Financial results announcement 2018/19
• Severn Trent Plc Annual Report and Accounts 2018/19
• Severn Trent Water Limited Annual Report and Accounts 2018/19
• Viability Statement and Going Concern
• Deloitte Full Year Audit Report
• Internal Audit update
• Annual Performance Report for Severn Trent Water
• Assurance of ODI Performance
• Annual Performance Report for Hafren Dyfrdwy
• Assurance of ODI Performance
• Internal control and risk management effectiveness
• Cyber update
• Whistleblowing update
• Fair, balanced and understandable assurance process: Severn Trent Plc and Severn Trent Water
• Relevant Audit Information process: Severn Trent Plc and Severn Trent Water

Scheduled meeting
Financial Reporting

External Audit
Internal Audit
Regulatory – SEVERN TRENT
WATER
Regulatory – HAFREN
DYFRDWY
Internal Control and Risk
Management

Governance

In reviewing the financial statements,
the Committee receives input from the
Disclosure Committee, a sub-committee
of the Executive Committee which is
chaired by the CFO. It is responsible for
overseeing the Group’s compliance with
its disclosure obligations, considering
the materiality, accuracy, reliability and
timeliness of information disclosed and
assessment of assurance received.

The Disclosure Committee reviews
the proposed presentations to
analysts in conjunction with the draft
results announcements for both the
interim and full year results, applying
particular attention to the tone of the
announcements and presentations
to maintain consistency with the
financial statements.

Severn Trent Plc Annual Report and Accounts 2019

Governance

Audit Committee report continued
Accountability

Significant financial statement
reporting issues

The Committee looked carefully at those
aspects of the financial statements
which required significant accounting
judgments or where there was
estimation uncertainty. These areas
are explained in note 4 of the Group
financial statements.

The Committee receives detailed reports
from both the CFO and the External
Auditor on these areas and on any other
matters which they believe should be
drawn to the attention of the Committee.
The Committee also reviews the draft
of the External Auditor’s report on the
financial statements, with particular
reference to those matters reported as
carrying risks of material misstatement.

The Committee discusses the range
of possible treatments both with
management and with the External
Auditor and satisfies itself that the
judgments made by management are
robust and should be supported.

The significant issues that the Committee
considered in 2018/19 are set out below.

For all of the matters described below
the Committee concluded that the
treatment adopted in the Group financial
statements was appropriate.

Significant financial statement reporting issues

Issue
Going concern basis for the financial statements and long-term
viability statement.

Determination of the provision for impairment of trade receivables
in Severn Trent Water Limited.

At 31 March 2019, the provision in Severn Trent Water Limited’s
financial statements was £115.2 million and the charge for the year
was £24.2 million.

Severn Trent Water Limited has a statutory obligation to continue
to supply water and waste water services to customers even when
their bills are unpaid. This increases the risk of bad debts. In
addition it has a large and diverse customer base which requires
impairments against trade receivables to be assessed on a
systematic basis.

Revenue recognition in relation to the estimation of metered
revenue from the new non-household retail market in Severn Trent
Water Limited.

In the year ended 31 March 2019, Severn Trent Water Limited
recognised £379 million in revenue from sales to retailers in the
new non-household retail market.

On 1 April 2017, the non-household retail market in England
opened to competition. This enabled all non-household customers
to choose their water and waste water supplier although
wholesale services remained with the incumbent companies.
Market Operator Services Limited (‘MOSL’) was established
to operate the market and to provide data to wholesalers and
retailers to allow settlement between market participants to
take place. MOSL provides data for monthly settlement periods
based on actual meter readings and estimations extrapolated
from the last known meter read. This is an iterative process with
subsequent settlement runs including more actual readings for
the same period. Empirical observations have shown that metered
consumption is consistently higher than the previous estimates.

How the issue was addressed by the Committee
The Committee reviewed and challenged the evidence and
assumptions underpinning the use of the going concern assumption
in preparing the accounts and in making the statements in the
Strategic report on going concern and long-term viability.

The Committee challenged the changes made to the methodology
for calculating the provision during the year and critically appraised
management’s explanations for these changes.

The Committee considered the work performed by the External
Auditor and the conclusions they reached regarding the adequacy of
the provision.

The Committee determined that no adjustment to the amounts
recorded was required.

The Committee does not consider that there is a significant risk of a
material adjustment in respect of this estimate in the next financial
year because the estimated amount is not material. Nevertheless,
the Committee considered this to be a significant issue because the
systems and processes are new and the amounts recognised are
subject to management judgment.

The Committee reviewed the process for calculating the metered
revenue estimate from non-household retailers and considered
the reasonableness of the estimates in the light of emerging trends
and the experience of other market participants. The Committee
scrutinised management’s evidence supporting its judgments and
examined the data from the underlying evidence. The Committee
discussed the External Auditor’s work and their conclusions.

The Committee determined that the approach taken by management
was reasonable and that no adjustment was required to the amounts
recognised in the financial statements.

The proposed classification of costs between operating
expenditure and capital expenditure in Severn Trent Water Limited.

The Committee considered the application of the Group’s accounting
policies in relation to capital expenditure during the year.

Severn Trent Water Limited has a significant capital programme
that includes projects made up of a combination of expenditure
and activities, some of which are recognised as property, plant and
equipment and some of which are recognised as operating costs.
For most of the expenditure this distinction is clear but there is an
element where subjective judgments are required to determine the
appropriate accounting treatment.

The Committee enquired of management whether the policies had
been applied consistently from year to year and sought explanation
for the increase in amounts capitalised. The Committee considered
the results of the External Auditor’s work and discussed the
conclusions with the External Auditor.

The Committee determined that no adjustment to the amounts
recorded was required.

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

Issue

Determination of the amount of the Group’s retirement benefit
obligations.

At 31 March 2019, net retirement benefit obligations amounting to
£452.9 million were recognised.

The net obligation recognised on the balance sheet is the
difference between the fair value of the schemes’ assets at the
balance sheet date and the present value of the benefits expected
to be paid to members of the schemes. This requires assumptions
to be made regarding expected age of retirement and longevity of
members, future inflation rates and increases to benefits. It is also
necessary to determine an appropriate discount rate to calculate
the present value of the estimated gross obligations. Management
takes advice from external qualified actuaries who perform the
calculation of the present value of the benefits based on the
assumptions set by management.

Implementation of IFRS 9 and IFRS 15.

These accounting standards were adopted by the Group with effect
from 1 April 2018. The impacts of adoption are set out in note 2
to the Group financial statements. The main impact of IFRS 9
is in relation to the method of calculating the bad debt provision
(see above).

IFRS 15 introduced a new methodology for determining the
recognition of revenue. Management assessed its existing
practices for recognising revenue against the methodology set out
in IFRS 15, as explained in note 2 of the Group financial statements.
There were no changes required to the recognition of revenue
from water and waste water services. The main impact in Business
Services was in relation to a 25 year contract with the Ministry
of Defence.

How the issue was addressed by the Committee
The Committee scrutinised the assumptions underlying the
valuation of the obligations, noting and probing assumptions that
were not in line with their expectations, including developments
in respect of Guaranteed Minimum Pension (‘GMP’) rights. The
Committee considered whether the assumptions taken as a whole
were appropriate, taking into account the work of the External
Auditor and the benchmark information provided by them.

The Committee considered that the assumptions were reasonable
and that no adjustment was required to the draft Group financial
statements.

The Committee considered the approach to determining expected
lifetime credit losses on accounts receivable and in particular
challenged subjective judgments made by management relating to
future credit losses.

The Committee noted that the impact of these judgments was not
material and concluded that these were reasonable.

The Committee challenged management’s analysis of the
application of IFRS 15 to the water and waste water services and
concluded that it was appropriate and in line with industry practice
in this area.

The Committee also challenged management’s application of IFRS
15 to the Ministry of Defence contract, noting that the impact was
not material, in particular the estimates of future revenue and costs
underpinning the calculation of revenue. The Committee concluded
that the outcome was reasonable.

Internal control over
financial reporting

The Group has established procedures
for exercising control and managing risk
in relation to Group financial reporting
and preparation of Group financial
statements including:

• 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;

• a range of system, transactional

and management oversight controls
embedded into our financial processes;

• 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;

Severn Trent Plc Annual Report and Accounts 2019

• oversight by the Disclosure Committee

of the Group’s compliance with its
disclosure obligations; and

• monthly reviews by the Executive

Committee and the Board of
financial reports from the Group’s
operating businesses.

Internal and External Audit

Internal Audit and internal controls
Internal Audit is an independent
assurance function available to the
Board, Audit Committee and all levels of
management. The Internal Audit function
is supported by two main co-sourcing
partners, PricewaterhouseCoopers and
Ernst and Young. The arrangement is
reviewed annually and the Committee
believes this structure adds value,
through greater access to specific
areas of expertise, increased ability
to flex resources, and the ability to
challenge management independently.
Co-source specialists will continue to
bring expertise to support the team and
delivery of the audit plan where relevant.

The role of Internal Audit is to provide
assurance that the Group’s risk
management and internal control
systems are well designed and operate
effectively and that any corrective action
is taken in a timely manner. Each year,
Internal Audit develops an annual
risk-based audit plan for approval by
the Audit Committee and performance
dashboards to enable onward monitoring
of the plan’s execution. The Audit
Committee challenges the audit plan,
specifically whether the key risk areas
identified as part of the ERM process are
being audited with appropriate frequency
and depth, and also by bringing an
external view of risks the Company
may be exposed to. The performance
dashboards summarise the performance
of the Internal Audit function over the
year against key measures and are
reviewed by the Committee twice a
year. Following the completion of each
planned audit, the Internal Audit function
seeks feedback from management which
is reported through the performance
dashboards and assessed in turn by
the Audit Committee twice a year.
The effectiveness of the controls over
financial reporting is also monitored by

Governance

Audit Committee report continued
Accountability

the Audit Committee, which receives
regular reports of the testing conducted
by the External Auditor.

The Audit Committee is confident that,
where any failings or weaknesses are
identified in the course of its review of
internal control systems, management
puts in place robust actions to address
these on a timely basis. An 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. To ensure
continued efficiency, an external review
of the effectiveness of the Internal Audit
function was carried out in January
2019. The review, performed by BDO,
concluded that the Internal Audit
function is fit for purpose, is operating
efficiently and effectively and in line with
good practice.

External Auditor
Annually, the Committee reviews
the External Auditor’s audit plan and
reviews and assesses information
provided by them confirming their
independence and objectivity within
the context of applicable regulatory
requirements and professional
standards. Deloitte contributes a further
independent perspective on certain
aspects of the Company’s financial
control systems arising from its work,
and reports both to the Board and the
Audit Committee.

Following a formal tender process in
2015/16, Deloitte LLP was reappointed
as External Auditor at the 2016 AGM.
The senior statutory Auditor, Kari
Hale, has overseen the audit of the
Severn Trent Group since 2015/16.
Further information on Kari’s experience
can be found on the Deloitte website.
The Company intends to put the External
Audit out to tender at least as often as
is required by applicable law, rules,
regulations and best practice in line with
the Competition and Markets Authority
and EU requirements for mandatory
tendering and rotation of the audit
firm. Under current regulations the
External Audit must be put out to tender
by 2025 and Deloitte will not be able to
participate. The Company has complied
with the provisions of the CMA Audit
Order during the financial year.

The Committee considers the
effectiveness of the External Auditor
every year and a full effectiveness review
was conducted this year. The review
involved assessment of the Auditor by
the Committee and key Executives and
evaluation of whether the Auditor meets
minimum standards of qualification,
independence, expertise, effectiveness
and communication.

The feedback collected through the
process has been shared with Deloitte
and an action plan has been drawn
up with them and built into the audit
programme. Based on our consideration
of the responses to the effectiveness
review the Committee remains satisfied
with the efficiency and effectiveness of
the audit.

Non-audit fees
The Company has approved a formal
policy on the provision of non-audit
services aimed at safeguarding and
supporting the independence and
objectivity of the External Auditor.
A copy is available on the Severn Trent
Plc website.

The process for approving all non-audit
work provided by our Auditor is overseen
by the Committee in order to safeguard
the objectivity and independence of the
Auditor. Prior to approval, consideration
is given to whether it is in the interests
of the Company that the services are
purchased from Deloitte rather than
another supplier. Where Deloitte has
been chosen, this is as a result of their
detailed knowledge of our business and
understanding of our industry as well
as demonstrating that they have the
necessary expertise and capability to
undertake the work cost-effectively.

The policy was revised in early 2016,
ahead of new EU regulations coming
into force in June 2016, to provide that
non-audit fees and independence of our
Auditor would continue to be subject
to ongoing review in light of those
rules. The current policy, which was
reviewed by the Committee during the
year, continues to comply with the EU
regulations and requires approval by the
Committee or its Chairman if a non-
audit service provided by the Auditor is
expected to cost more than £100,000.
The policy also prohibits aggregate fees
from non-audit services in excess of 70%
of the audit fee for the year.

Non-audit services where the External
Auditor may be used include: audit-
related services required by statute or
regulation, services related to fraud,
Corporate Responsibility report reviews
and regulatory support.

During the year, Deloitte received
£681,000 in fees for work relating to the
audit services they provide to the Group.
Non-audit related work undertaken by
Deloitte amounted to fees of £183,000
this year, which amounts to 27% of the
total audit fees paid to them. Fees paid
to Deloitte are set out in note 7 of the
financial statements on page 153.
Details of significant non-audit work
undertaken are set out on page 153.

In approving these non-audit fees, the
Committee considered the overall ratio
of non-audit fees to audit fees and,
given the scope of work, considered that
Deloitte was best placed to perform
these services.

Regulated subsidiaries
The regulated activities carried out
by Severn Trent Water and Hafren
Dyfrdwy also require annual reporting
submissions to Ofwat which are reviewed
by the Committee. They include an
annual submission on their regulatory
performance and obligations
known as the Annual Performance
Report, together with a Compliance
Statement and a statement to underpin
the customer charges made by
each subsidiary.

In November 2018, the Committee
reviewed the statement of risks,
strengths and weaknesses and
draft assurance plans for Severn
Trent Water and Hafren Dyfrdwy,
which is a requirement of Ofwat’s
Company Monitoring Framework.
These documents set out the process,
timeline and assurance framework
in place for information published for
customers and other stakeholders,
including the Annual Performance
Report. For each of Severn Trent Water
and Hafren Dyfrdwy, Deloitte provides an
audit opinion on the regulatory financial
reporting and price control segmentation
sections of the respective Annual
Performance Reports.

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

The respective Annual Performance
Reports also provide an overall picture
of performance, covering many aspects
which are not financial including
performance against commitments and
ODIs for each of Severn Trent Water and
Hafren Dyfrdwy. Both Severn Trent Water
and Hafren Dyfrdwy appoint independent
engineering consultants, to report and
provide assurance on those aspects.
The Committee receives reports from
Jacobs and Deloitte on their work for
Severn Trent Water, and Black & Veatch,
Jacobs and Deloitte for Hafren Dyfrdwy,
as part of its review of the respective
Annual Performance Reports.

Risk management
The Audit Committee reviews the
processes for, and outputs from, the
Group’s ERM process, through which
our principal risks and related controls
are identified. The Committee also
reviews the effectiveness of the risk
management system on behalf of the
Board and keeps under review ways
in which to enhance the control and
assurance arrangements.

The Committee receives half-yearly
reports from the Head of Risk 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.

To further enhance the clarity of
reporting and insight that can be
gained from this ERM information ‘risk
flightpaths’ are now reported to the
Audit Committee.

These demonstrate the level of risk the
Group faces and the timeline for the key
risk mitigation steps to manage the risk
to the target position. The flightpaths
help to facilitate a more thorough review
of the target risk positions, consider risk
appetite and assess whether actions are
on target, with the correct prioritisation
in place.

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 2019 and up
to the date of this report, which is in
accordance with the Code and Guidance
on Risk Management, Internal Control
and Related Financial and Business
Reporting September 2014. A risk
identification and horizon scanning
update was provided to the Board
in March 2019. The Board also gave
consideration to emerging risks, with
specific attention being given to those
emerging risks considered to be of
ongoing importance to the Group and
its stakeholders. Further details on
emerging risks can be found on page 55
of the Strategic report.

In its review of risk management during
the year, the Board explicitly considered
the target position for significant risks
and whether target risk positions are
appropriate. It also confirmed that
suitable timescales had been agreed for
reaching them.

Further detail on the ERM process
can be found in the Strategic report on
page 54.

Non-Audit Fees 2018/19

Nature of service

Reason for Deloitte’s appointment

Fees (£’000)

Audit related assurance services

Interim review

Assurance of regulatory returns

Reporting under Group financing documents

Subtotal

Other assurance services

This work is akin to an audit and is expected to be performed
by the External Auditor. The same safeguards that apply to
the External Audit also apply to this work.

Audit of sections 1 and 2 of the Hafren Dyfrdwy and Severn Trent
Water Annual Performance Reports is closely related to the External
Auditor’s statutory audit work and the two assignments are performed
in parallel.

These documents require reports and it is normal practice for the
Auditor to provide these.

Assurance in connection with PR19 Business Plan
submission

Agreed-upon procedures relating to financial data tables submitted to
Ofwat as part of the PR19 process for Severn Trent Water and Hafren
Dyfrdwy.

Other assurance

Subtotal

Total 2018/19 non-audit fees

Severn Trent Plc Annual Report and Accounts 2019

152

183

Governance

Audit Committee report continued
Accountability

Risk management governance process
The Group’s risk management governance process is based on the three lines of assurance model and is scrutinised by the Audit
Committee, through delegated authority from the Severn Trent Plc Board.

Policy oversight
GAA | Doing the Right Thing | Group policies

Risk tolerance

Risk appetite

BOARD

Delegated authority

AUDIT COMMITTEE

Report
ERM reports

Internal Audit
Whistleblowing
Bribery and fraud

Third line of assurance – Internal Audit

Independent review and oversight by Internal Audit, which
independently evaluates the adequacy and effectiveness of the
Group’s risk management control and governance processes.

Inform
and
improve

Second line of assurance – management/ERM team

Business units are monitored by management and the
ERM team which monitors, and provides assurance, on compliance
with Group policies and procedures. The ERM team reports to the
Audit Committee and Board on the ERM process, principal risks
and related controls.

Inform
and
prioritise

First line of assurance – line management/risk champions

Line management accountability for compliance with Group policies,
Doing the Right Thing and GAA. Risk champions within each business
unit identify, collate and report risk data to the ERM team.

OVERSIGHT

Severn Trent Plc Annual Report and Accounts 2019

Treasury Committee report
Accountability

Chairman’s
message

John Coghlan
Chairman of the Treasury Committee

Attendance table

Committee
Member
John Coghlan
Philip Remnant
James Bowling

Meetings
attended
5
5
5

Max
possible
5
5
5

The members of the Committee
in 2018/19 are shown above.
The Group Treasurer is also a member
of the Committee, but not a member of
the Board.

Only members of the Committee have
the right to attend Committee meetings.
In addition to the attendance set out
above, Andrew Duff, Kevin Beeston, the
Group Commercial Director and the
Group Financial Controller normally
attend, by invitation, all meetings of
the Committee. Other individuals may
be invited to attend meetings as and
when appropriate.

The Committee’s Terms of Reference were
updated in March 2019.

Strategic report
Governance
Group financial statements
Company financial statements
Other information

Dear Shareholder

I am pleased to introduce this report
which details the role of the Treasury
Committee and the important work it has
undertaken during the year.

The Committee continues to play a
key role in supporting the Board in
monitoring performance against the
Group’s approved Treasury Policy and
annual Treasury Plan, reviewing in detail
the Group’s funding requirements and
providing oversight of the Group’s key
financing risks and opportunities.

The Committee has undertaken reviews
of the Treasury Policy Statement and
energy risk management strategy and
agreed changes where required. It has
also maintained its focus on the Group’s
credit ratings and key financial ratios, in
full consideration of the PR19 Business
Plan submission this year.

The Committee held five meetings during
the year and has met once since the end
of the financial year. There have also
been three additional meetings held
throughout the year. I would like to thank
the members of the Committee, the
management team and the Committee’s
independent advisers, Evercore, for
their continued commitment and
the importance they all attach to the
Committee’s work.

The Committee’s performance was
assessed as part of the annual Board
Effectiveness evaluation. I am pleased
that the Committee is regarded as
operating effectively and the Board takes
assurance from the quality of its work.

The Committee has spent a significant
proportion of its time overseeing
the development of Severn Trent
Water’s PR19 financing strategy.
Following Severn Trent’s selection as a
fast-track company, the Committee has
continued its focus on ensuring that we
enter AMP7 in a strong funding position
that takes account of changes to the
regulatory allowance and fully considers
financing risks and opportunities.

Treasury Committee
Responsibilities

• oversight of interest rate and inflation

risk management strategies, in
particular, the monitoring of the impact
of changes in forecast interest rates
and inflation on Group earnings;

• oversight of the Group’s

funding strategy;

• monitoring the Group’s exposure to

financial institution credit risk;

• monitoring the Group’s exposure to

foreign currency risk;

• monitoring the Group’s exposure to

financial liquidity risk;

• oversight of energy exposure risk

management strategies;

• receiving updates on general financial

market movements;

• oversight of treasury internal controls;

and

• oversight of the Group’s pension
schemes’ investment strategy.

Key areas of focus in 2018/19

The Committee provides Board oversight
of the Group’s key financing risks
and opportunities.

Some key areas of discussion for the
Committee during 2018/19 included:

• the impact of prevailing economic
conditions on the forecast of long-
term interest rates and associated
interest rate and inflation risk
management policy;

• the impact of Brexit on existing and
future sources of funding for the
Group’s businesses;

• the AMP7 financing strategy;

• the AMP7 energy procurement

strategy; and

• the review of the Group’s European
Medium Term Note Programme
and approval for bonds to be issued
pursuant to that Programme during
the year.

John Coghlan
Chairman of the Treasury Committee

The responsibilities of the Committee are
explained below:

Documents available at severntrent.com

Treasury Committee Terms of Reference

• oversight of treasury activities
in implementing approved
treasury policies;

Severn Trent Plc Annual Report and Accounts 2019

Governance

Corporate Responsibility Committee report
Accountability

Chair’s
message

Dame Angela Strank
Chair of the Corporate
Responsibility Committee

Attendance table

Committee
Member
Dame Angela
Strank (Chair)
Andrew Duff
Dominique
Reiniche
Liv Garfield

Meetings
attended
4

Max
possible
4

4
4

In addition to the attendance set out
above, the Company Secretary and Head
of Corporate Responsibility normally
attend, by invitation, all meetings of
the Committee. Other members of senior
management are also invited to attend
as appropriate.

The Committee’s Terms of Reference were
updated in March 2019.

These include expanding the scope of
our biodiversity agenda beyond Severn
Trent sites and providing a focus on flood
protection, recreational facilities and
improved water quality. This biodiversity
agenda complements the Government’s
25 Year Environment Plan and it is
strongly supported by our stakeholders.
The Committee also discussed the
approach to carbon and climate change,
including our triple pledge to become
carbon neutral by 2030, have 100%
electric vehicles by 2030 (as long as the
vehicles are available) and generate
100% renewable energy by 2030.
This pledge is even more ambitious than
a science-based target and builds on our
long track record of making year-on-year
reductions in emissions.

Other matters we have focused on this
year include employee volunteering and
responsible supply chain management.
Additional information on these
matters can be found on pages 44 and
45 respectively.

Towards the end of the year, the
Committee reviewed our community
dividend approach. This is a new
commitment to invest 1% of our profits
in community projects, providing a really
exciting opportunity to make positive
impact in our region. The first grants will
be made available in 2021.

I should like to thank the members
of the Corporate Responsibility
Committee for the open, constructive
and progressive discussions that take
place at our meetings and their personal
commitment to our wide ranging and
impactful agenda.

Dame Angela Strank
Chair of the Corporate
Responsibility Committee

Documents available at severntrent.com

Corporate Responsibility Committee
Terms of Reference
Modern Slavery Statement
Group Environment Policy

Dear Shareholder

As Chair of the Corporate Responsibility
Committee, I am pleased to introduce
this report which details the work
undertaken by the Committee during
the year as well as the role it plays in
developing the Group’s societal purpose.
You can read more about our social
purpose on page 6. The following account
provides detail on the activities of the
Committee, an overview of the topics
discussed and steps taken to address
any actions.

I’m very pleased to report that we’ve
had a particularly strong year on
improving biodiversity, Catchment
Management, education, for example
through our Wonderful Water Tour,
helping customers who are in genuine
need to pay their bills and our continued
commitment to renewables through our
acquisition of Agrivert.

The Committee plays a key role in
supporting the Board within the
Governance Framework, by providing
guidance and direction to the
Company’s Corporate Responsibility
and Sustainability Programme.
The Committee also provides oversight
of the Group’s key non-financial risks
and opportunities.

The Committee reviewed the Group’s
performance across a range of
corporate responsibility commitments
and reviewed regular whistleblowing
reports. We also reviewed our approach
to modern slavery, and were pleased
that our 2018 Modern Slavery Statement
ranked 16th in the Business and Human
Rights Resource Centre’s review of
FTSE100 companies.

The Committee also discussed
evolving reputational risks and how
these are being managed, including
renationalisation and climate change.
Further information on our Group risks
can be found on pages 56 – 61.

The Committee spent a significant
proportion of its time focusing on Severn
Trent’s role as an environmental leader,
reviewing aspirations, commitments
and performance to date. As part of
this work, the Committee reviewed our
approach to biodiversity including new
more ambitious targets for AMP7.

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

Our Corporate Responsibility
Framework

Our Corporate Responsibility Framework
(the ‘Framework’) is ambitious, broad
ranging and underpinned by stretching
targets, to ensure we are delivering
the commitments expected of a leading
socially and environmentally responsible
business. Acting in a responsible manner
is integral to our purpose of serving our
communities and customers, building
a lasting water legacy and achieving
our vision to be the most trusted water
company by 2020. We hold ourselves
to account against our Framework
and agreed metrics through an
effective performance management
system. Our Corporate Responsibility
performance is embedded within the
organisation, with ODIs linked to the
majority of our metrics, enabling the
Company to focus on issues important
to our customers.

Performance against the Framework
is regularly reported to the Committee,
and in our Annual Report and Accounts,
on our website and through selected
environmental, social and governance
(‘ESG’) indices. You can read more on
page 29.

Employee rewards are directly linked
to our Corporate Responsibility
performance, with customer ODIs,
health and safety and our key
metrics contributing to employee
bonus. We believe that by focusing
on the issues most important to our
customers, our Framework has the
right focus. In 2019/20, our aspirations
and commitments will be reviewed in
line with our new PR19 plan and our
commitments for the next five years.

‘Doing the Right Thing – The
Severn Trent Way’

At the heart of Severn Trent’s culture
is a closely held set of values called
‘Doing the Right Thing’. These values
embody the principles by which the
Group operates and they provide a
consistent framework for responsible
business practices.

‘Doing the Right Thing’ is supported by
a number of policies which guide our
workforce and suppliers. These policies
codify how to identify and deal with
suspected wrongdoing, fraud or
malpractice; how to maintain the highest
standards of safety; and how to apply
good ethics and sound judgment.

Key areas of Corporate Responsibility Committee focus in 2018/19

A summary of the matters considered at each meeting is set out below:

April 2018

• Corporate Responsibility performance report
• Community Champions – Our Employee Volunteering programme
• Internal Audit Plan 2018/19
• Anti-Slavery and Human Trafficking Statement 2018 – Update
• 2018/19 Annual Report – Approach
• Committee Terms of Reference: Annual Review
• Whistleblowing report
July 2018

• Reducing Our Carbon Footprint
• Improving the Biodiversity of Our Region
• Anti-Slavery and Human Trafficking Statement 2018
• Internal Audit Open Actions in Relation to Corporate Social Responsibility
• Whistleblowing report
November 2018

• Corporate Responsibility performance report
• Engaging Responsibly with Our Supply Chain
• Political Risks
• Realising Our Vision for Environmental Leadership
• Whistleblowing report
March 2019

• Corporate Responsibility performance report
• Climate Change Mitigation and Adaptation Strategy
• Zero Carbon Strategy
• Modern Slavery Update 2019
• Establishing our Community Dividend
• Whistleblowing report

Severn Trent Plc Annual Report and Accounts 2019

Governance

Corporate Responsibility Committee report continued
Accountability

Our Code of Conduct is embedded
throughout Severn Trent and forms
a key part of our Company induction
and all employees are required to
complete an e-learning training
module to ensure they understand their
personal responsibilities.

Human Rights and
Modern Slavery

We are committed to protecting the
human rights of our employees and
contractors as we have clearly set
out in our Code of Conduct, ‘Doing the
Right Thing’. We have a responsibility
to understand our potential impact on
human rights and to mitigate or eliminate
any potentially negative impacts.
Whilst not having a specific human
rights policy, we have Group policies on
Human Resources, Anti-Bribery and
Anti-Fraud, Whistleblowing (‘Speak Up’)
and Procurement.

We will always treat people in our
business and supply chain fairly and
have a clear zero tolerance approach to
modern slavery. To date we have had no
instances of modern slavery raised, but
we are not at all complacent and are fully
committed to protect against modern
slavery in our business and supply chain.
Our understanding is constantly evolving
and we are continually adapting and
improving our approach accordingly.
We know modern slavery is a growing
global issue and know our customers
and stakeholders share our concern.
Our highest risk is through our supply
chain. Therefore we work with our
suppliers to ensure they operate to the
same standards we set ourselves, and
we have also been working closely with
our suppliers to ensure they understand
the risks involved in their own supply
chains. All suppliers are required to
sign up and operate in line with our
Code of Conduct, which clearly states
zero tolerance, and this is built into our
procurement tender process.

We have been working with Hope for
Justice for three years to develop our
approach. Our full Anti-Slavery and
Human Trafficking Statement can be
found on the Severn Trent Plc website.

Dame Angela Strank met employees at our Minworth site, observing first hand their
contribution to our renewable energy commitment.

Freedom of Association and
Collective Bargaining

We recognise the right of all employees
to Freedom of Association and Collective
Bargaining. We seek to promote
co-operation between employees, our
management team and recognised Trade
Unions. We meet with our Trade Unions
on a quarterly basis at the Employee
Forum and see mutual benefit in sharing
information with our colleagues and
seek their feedback and suggestions.
We believe this fosters a common
understanding of business needs and
helps to deliver joint solutions aimed
at making our business successful.
Our Employee Forum also provides an
invaluable opportunity for engagement
with the whole workforce to ensure
workforce views are taken into account.

Whistleblowing

Our employees, and wider workforce,
can raise concerns at work through
their line manager, senior management
and through our confidential and
independent whistleblowing helpline,
‘Safecall’. All investigations are carried
out independently and the findings are
reported directly through to the Audit and
Corporate Responsibility Committees.

Prevention and detection of
bribery and corruption

Our Group financial crime policy
prohibits bribery, corruption and fraud
in all our business dealings, regardless
of the country or culture within which we
work. This year we have also updated our
policy to take into account the new tax
evasion offences. Employees identified
as high risk, through a risk review for
all Group employees, are required to
undertake an online training module
and test to ensure awareness of,
and compliance with, anti-bribery
and corruption.

Responsible business practices are an
integral part of our business strategy.
Performance against our Corporate
Responsibility commitments are
reported throughout our Annual Report
and Accounts reflecting their embedded
nature. You can read more on page 29
and on our dedicated ESG webpage,
on the Severn Trent website.

Severn Trent Plc Annual Report and Accounts 2019

Directors’ remuneration report
Remuneration

Strategic report
Governance
Group financial statements
Company financial statements
Other information

Dear Shareholder

As a Committee, the last year has been
spent building on the foundations of a
well-received Remuneration Policy (‘the
Policy’) and ensuring that our strong and
well-respected approach to governance
also reflects the latest changes in the
2018 UK Corporate Governance Code
(‘the 2018 Code’).

We have seen a number of decisions
made by management to support
preparations for the next Asset
Management Plan (‘AMP’) and a
continued desire to invest responsibly
for sustainable growth. This has been
combined with successfully navigating
operational challenges, including the
prolonged hot, dry summer, as well
as achieving fast-track status for our
Severn Trent Water PR19 submission.

The Committee is cognisant of
developments in governance
expectations and our responsibilities
relating to disclosure and transparency
of all aspects of executive pay and
alignment of reward throughout the
workforce. With this in mind, the
Committee recognises the contribution
made by all employees to put customers’
needs at the heart of our business
throughout the year in delivering an
essential public service.

Further comment on our overall
performance during the financial year
can be found in the CEO’s review on
page 21.

The Committee has met four times
during the year and twice since the end of
the financial year.

Remuneration for the year
under review

We received overwhelming shareholder
support and approval of the Policy at
last year’s AGM, and a summary of
the voting is shown in the table below.
This is, I believe, testament to how we
align our remuneration decisions with
our business strategy, as well as the
extensive shareholder consultation
and engagement process undertaken
beforehand. The full Policy can be
found on the Severn Trent Plc website
and on pages 120 to 128 in the 2018
Remuneration Committee report.

Through our At a Glance section, on page
100 we summarise the performance
outcomes against our remuneration
framework, in the context of how the
Policy was applied in 2018/19.

The annual bonus will pay out at 70.2% of
salary for both the CEO and the CFO.

The 2016-2019 Long Term Incentive Plan
(‘LTIP’) has vested at 100%, driven by
the strong cumulative performance of
our Return on Regulated Equity (‘RoRE’)
over the three year performance period.
The component parts of RoRE are
customer Outcome Delivery Incentives
(‘ODIs’), financing and Totex (total capital
and operational expenditure).

The Committee believes that the
outcomes of the bonus and LTIP
accurately reflect the performance of the
Company over this period. No discretion
has been exercised by the Committee
in respect of either the 2016 LTIP or the
2018/19 Annual Bonus.

2018 AGM Shareholder voting

Resolution
Approve Remuneration Policy

Approve Directors’ remuneration report

Votes
for
165,243,866
(99.18%)
165,511,103
(99.34%)

Votes
against
1,369,398
(0.82%)
1,100,476
(0.66%)

Votes
withheld
266,854

273,463

Chairman’s
letter

Philip Remnant
Chairman of the Remuneration Committee

Attendance table

Committee Member
Philip Remnant
(Chairman)
Andrew Duff
Kevin Beeston
Dame Angela Strank

Contents
Chairman’s letter
At a Glance
Summary of Remuneration
Policy and Implementation
Employment at Severn Trent
Annual Report on
Remuneration

Attendance
in 2018/19
4/4

4/4
4/4
4/4

Page
97
100
104

108
117

The Committee’s Terms of Reference,
were updated in March 2019 and are
available on the Severn Trent website,
alongside the Remuneration Policy which
was approved at the Annual General
Meeting (‘AGM’) on 18 July 2018.

All Committee members are independent
Non-Executive Directors, as defined
under the 2016 UK Corporate Governance
Code (‘the Code’), with the exception of the
Company Chairman who was independent
on his appointment. Full biographies of
the Committee members can be found on
pages 66 to 67.

The Committee members have no
personal financial interest, other than as
shareholders, in the matters considered
by the Committee.

Severn Trent Plc Annual Report and Accounts 2019

Governance

Directors’ remuneration report continued
Remuneration

Employment at Severn Trent

The Chairman and CEO regularly
attend the Employee Forum, and in
the coming year I and the other Non-
Executive Directors will also attend.
The Committee will continue to use
the voice of the employee as valuable
insight when making wider remuneration
decisions. Our all-employee Annual
Bonus Scheme ensures alignment of
reward throughout the organisation,
and rewards delivery of our customer
priorities now and in the future.

We are extremely proud to have
been recognised as the first socially
purposeful company in the utility
sector, and the section on page 111
highlights our evolving diversity and
inclusion policies and accomplishments;
in particular, our top four position in
the 2018 Hampton-Alexander Review,
and also our focus on Social Mobility,
recognised in the Social Mobility
Employer Index 2018 detailed on page
113. More detail on our Social Purpose
can be found on page 6.

Remuneration in the year ahead

We remain committed to delivering a
leading and transparent remuneration
framework, supported by strong
governance processes, designed
to drive the right behaviours across
the whole organisation and deliver
long-term success, meeting the needs
of our customers, shareholders and
communities we serve.

As a Committee, we recognise the
importance of taking into consideration
the relationship between operational
performance and relative remuneration,
when designing our LTIP and Annual
Bonus Scheme, and we believe that there
are three areas which set us apart:

• Our LTIP will continue to be based on
upper quartile (‘UQ’) stretch RoRE
performance. This means, to be fully
rewarded, management must deliver
one of the best service and cost
performances compared with other
companies in the sector, aligning
reward with the interests of both
investors and customers.

• We are changing the weighting of

existing elements within our Annual
Bonus Scheme. Whilst the focus of
the bonus will remain combined ODI
and PBIT performance, the changes
will drive an even stronger operational
culture within Severn Trent, as we
transfer smoothly into the new AMP.

• We continue to apply a consistent
bonus scheme design throughout
the organisation, from the front line
to Executive Directors, ensuring
that every employee is incentivised
and rewarded to deliver the same
shared objectives.

We are cognisant of the requirements
of the 2018 Code, and our approach to
future reporting is set out on page 114.
We will continue to evolve our disclosure
on executive pay taking into account
best practice.

The At a Glance section on page 100
outlines how the Committee intends to
implement the Policy in 2019/20.

Ongoing Shareholder
communication

In line with our commitment to
maintaining a credible and transparent
remuneration framework, in April
2019 we contacted our 30 largest
shareholders representing over 50%
of our issued share capital, as well as
Glass Lewis, The Investment Association
and ISS, to inform them of proposed
changes to the operation of our annual
bonus for the 2019/20 financial year.
These are all within the remit of the
current Policy.

The Board is confident that the Company
is making strong progress against
its priorities and delivering value for
all our stakeholders (shareholders,
customers and colleagues). The focus
for the remainder of AMP6 is to deliver
the very best service to our customers
and build a resilient future to protect
our services and the environment going
into AMP7. A number of objectives drive
this strategic focus and achieving these
objectives will ensure that we continue to
deliver long-term, sustainable value for
all our stakeholders. As the Company’s
strategic priorities evolve, the Committee
firmly believes that the operation of the
bonus must evolve with it.

Our approach has increased focus
on customers, asset health and the
environment. We are committed to
building a resilient future over the longer
term, and believe that by making these
adjustments to our bonus scheme we are
strengthening the alignment between
reward outcomes and strategic priorities
for both the coming financial year and the
years ahead. The changes will:

• Increase the proportion of bonus

attributed to Customer and
Environment ODIs from 28% to 35%;

• Create three sub-categories within the
Customer and Environment element
of the bonus, which all directly relate
to the delivery of a resilient service for
our customers:

– Customer Outcomes (15%);

– Asset Health (10%); and

– Environment and Social Outcomes

(10%);

• Retain the element of the bonus around
customer complaints and its weighting
of 8% but align measurement with
Ofwat’s proposed new approach
(known as ‘C-Mex’ – Customer Service
Measure of Experience);

• Reduce the proportion of bonus linked

to PBIT from 57% to 49%;

• Remove the bonus reward linked to
the delivery of personal objectives,
previously 7%. The Committee believes
that the individual contributions of
the members of the Executive will be
reflected in the outcomes for the other
bonus measures; and

• Retain the proportion of bonus linked

to Health and Safety at 8%.

The feedback and responses received on
the proposed changes were positive and
supportive overall of the Committee’s
approach, which also has the strong
support of Ofwat.

Committee performance

The Committee’s performance was
assessed as part of the annual Board
evaluation. I am pleased to report
that the Committee is regarded as
operating effectively and the Board
takes assurance from the quality of the
Committee’s work.

Philip Remnant
Chairman of the
Remuneration Committee

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

Key areas of Remuneration Committee focus in 2018/19
A summary of the matters considered at each meeting is set out below:

May 2018

Annual bonus outcome for 2017/18
2015 LTIP vesting
Salary increases for Executive Committee members and for Executive Directors
Annual bonus 2018/19 targets
LTIP awards for 2018
Final draft of Directors’ remuneration report for 2017/18
Review of AGM season
Update on Remuneration Policy consultation
November 2018

Reward and performance alignment 2017/18 compared with Water and Sewerage Companies (‘WaSC’) peers
Update on market practice and remuneration forward look
UK Corporate Governance Code update
Gender pay reporting 2018
Annual bonus 2018/19 – interim update
LTIP award – application of RoRE methodology
LTIP leavers
Annual bonus 2019/20 – design
January 2019

Executive Committee members and Executive Directors’ benchmarking review
Review of expense claims procedure for Chairman and CEO
LTIP awards for 2019
Annual bonus 2019/20 – structure and targets
Directors’ remuneration report planning for 2018/19
Review of mandatory shareholding requirements and update on sourcing for share schemes
March 2019

Executive Committee members and Executive Directors’ salary increase proposals
Terms of reference for the Remuneration Committee
Annual bonus 2018/19 – interim update
LTIP awards for 2019
UK Corporate Governance Code update
LTIP leavers
Review of fees for the Company Chairman

Who supports the Committee?

To ensure that the Company’s
remuneration practices are in line
with best practice, the Committee
has appointed independent
external remuneration advisers,
PricewaterhouseCoopers LLP (‘PwC’).
This appointment in 2017 followed a
selection process. PwC attends meetings
of the Committee by invitation. The CEO,
Director of Human Resources and, by
invitation, the Head of HR Operations
and Reward & Pensions Manager 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 acts as secretary to
the Committee.

PwC is one of the founding members of
the Remuneration Consultants Group
Code of Conduct and adheres to this
Code in its dealings with the Committee.
The Committee reviews the appointment
of its advisers annually and is satisfied
that the advice it receives is objective
and independent.

Fees for advice provided by PwC
to the Committee during the year
were £143,000 excluding VAT
(2017/18: £170,500). Separate teams
within PwC also provided unrelated
tax consulting, pensions, and other
assurance and advisory services during
the year.

Severn Trent Plc Annual Report and Accounts 2019

Governance

Directors’ remuneration report continued
Remuneration

At a Glance

Strategic alignment of remuneration

The following section sets out our
remuneration framework, a summary
of how the Policy was applied in
2018/19 in the context of our business
performance, and from page 104
details how the Committee intends to
implement the Policy in 2019/20.

The Committee believes it is important that, for Executive Directors and senior
management, a significant proportion of the remuneration package should be
performance-related, and that performance conditions applying to incentive
arrangements support the delivery of the Company’s strategy through our five
strategic priorities. The following table sets out how each of these is reflected in the
Annual Bonus Scheme and LTIP for 2018/19, and it will be updated next year to reflect
the 2019/20 Annual Bonus Scheme.

Strategy and its link to performance based pay

Embed customers
at the heart of
what we do

Driving operational
excellence and
continuous
innovation

Investing
responsibly for
sustainable
growth

Changing the
market for
the better

Creating an
awesome place
to work

How do we measure progress against our objectives?

• Internal

sewer flooding

• External

sewer flooding

• Minutes

without supply
• Water quality
complaints

• Improvements to
river water quality
• Number of Category
3 pollution incidents

• Successful
catchment
management
schemes

• Delivering our

capital programme

• Building

a sustainable
business

• Clear PR19 plan
• Compelling case
for investment
• Bioresources

change programme

• Be the sector’s
thought leader
• Create a strong
Welsh entity

• Lost time incidents

per 100,000
hours worked

How are our strategic objectives linked to our incentive plan?

Annual Bonus Scheme

Customer ODIs (20%)

RWWW PBIT (47%)

Customer ODIs (20%)

Customer
Complaints (8%)

Personal Objectives
(7%)

Business Services
PBIT (10%)

Personal Objectives
(7%)

Health and Safety
(8%)

RoRE * (100%)

RoRE* (100%)

LTIP

Wholesale Totex

Retail operating costs

ODIs

Financing

* Components of RoRE are:

100

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

2018/19 Single figure outcomes

The graphs show how the successful delivery of our strategy has flowed through to the rewards provided to our Executive Directors.
The full explanatory notes for each element of remuneration are detailed on page 117 in the Annual Report on Remuneration.

2018/19 Single figure outcomes £’000

CEO (Liv Garfield)

3,852

CFO (James Bowling)

4,000

3,000

2,000

1,000

897

2,199

2,395

2,194

2,009

1,198

1,253

1,158

547

Minimum

On-target

Maximum

Single ﬁgure
2018/19

Single ﬁgure
2017/18

Minimum

On-target

Maximum

Single ﬁgure
2018/19

Single ﬁgure
2017/18

Salary

Pension

Beneﬁts

Annual Bonus

LTIP

Share price growth

• Minimum pay is fixed pay only (i.e. salary + benefits + pension).

• On-target pay includes fixed pay, 50% of the maximum bonus (equal to 60% of salary for both the CEO and the CFO) and 50% vesting of the LTIP awards (with grant

levels of 200% of salary for the CEO and 150% of salary for the CFO), and illustrating 25% increase in share price on LTIP shares over the vesting period.

• Maximum pay includes fixed pay and assumes 100% vesting of both the annual bonus and the LTIP awards, and illustrating 50% share price increase on LTIP

shares over the vesting period.

• All amounts have been rounded to the nearest £1,000. Salary levels (which are the base on which other elements of the package are calculated) are based

on the salary paid during the year ended 31 March 2019. The value of taxable benefits is the cost of providing those benefits in the year ended 31 March 2019.
The Executive Directors are also permitted to participate in the all-employees Sharesave scheme, on the same terms as other eligible employees, but they have
been excluded from the above graph for simplicity.

Annual bonus 2018/19 outturn

Further details, including information on the performance assessment of personal objectives are set out on pages 118 and 119 in
the Annual Report on Remuneration.

RWWW
PBIT(i)

Customer
ODIs(ii)

Business
Services PBIT(iii)

Health and
safety(iv)

Customer
complaints(v)

Personal
performance

Threshold
(0% payable)

£515.1m

Target
(50% payable)

£528.1m

Maximum
(100% payable)

£541.1m

Actual £527.0m

£40m

£58.8m

0.17

Actual 0.30

Actual –14%

£60m

£60.8m

0.13

10%

Actual £91.1m

Actual £67.4m

£80m

£62.8m

0.09

15%

Weighting

47%

20%

10%

Outcome
achieved

21.5%

20%

10%

7% – CEO
7% – CFO

(i) Underlying profit as defined in note 45 to the Group financial statements.

(ii) Customer ODIs quoted pre-tax in 2012/13 prices and pre the regulatory customer ODI cap.

(iii) Underlying PBIT adjusted to remove £3.3 million impact of IFRS 15.

(iv) Measured as number of lost time incidents divided by number of hours worked multiplied by 100,000.

(v) Measured as the percentage reduction in written complaints.

CEO
CFO

2018/19
salary*
(£)
708.0
426.6

Bonus opp
(% salary)
120
120

Bonus outcome
(% max)
58.5
58.5

Annual Bonus
(£)
497.0
299.5

Cash bonus
(£)
248.5
149.8

Value of shares
awarded
(£)
248.5
149.7

* Bonus calculated using salary at 31 March 2019.

Severn Trent Plc Annual Report and Accounts 2019

101

Governance

Directors’ remuneration report continued
Remuneration

2016 LTIP vesting in 2018/19

The chart shows the outcome of the 2016
LTIP awards, for which the performance
period ended on 31 March 2019. The LTIP
which is based on RoRE over the three
years to 31 March 2019 will vest in
June 2019.

Further information is provided on
page 120 in the Annual Report on
Remuneration, including a breakdown
of the LTIP awards granted to Executive
Directors in 2018.

Business performance –
2018/19 outturns against Key
Performance Indicators (‘KPIs’)

The charts show our customer ODI and
RoRE performance since the beginning
of the current AMP. This strong sustained
level of performance when compared to
our Final Determination has informed
the level of reward received by our
Executive Directors and our employees
through the Company-wide bonus
scheme, which is linked to the same
performance measures.

2016 LTIP vesting in 2018/19

Threshold FD
(25% payable)

RoRE – measured
against multiple
of Ofwat FD

Maximum
(100%
payable)

CEO
outcome
(vesting as
% of award)

CFO
outcome
(vesting as
% of award)

1.39x

100%

Actual 1.76x

Number
of shares
granted

46,115

18,529

Award
vesting
(% max)

Face value
of shares
vesting(i)

100%

913.2

366.9

CEO

CFO

Value
attributable
to share
price
movement

Value of
dividend
equivalents
due(ii)

£0

£88.5

£35.6

Value of
resultant
award

£1,001.7

£402.5

(i) Based on 3 month average share price as at 31 March 2019 of £19.80.

(ii) Based on dividends paid in the period since date of grant to 31 March 2019.

Business performance – 2018/19 outturns against KPIs

ODI £m(i) (ii) (iii)

100

71.6

47.4

23.2

2015/16

2016/17

2017/18

Severn Trent

(4.5)

2018/19

(i)

2017/18 figure restated to reflect Ofwat’s decision on supply interruptions in their Final Determination
of in-period ODIs for 2018.

(ii) Customer ODIs quoted pre-tax in 2012/13 prices.

(iii) 2018/19 figure is post the regulatory customer ODI cap. Pre cap the net reward was £91.9 million

as shown in the annual bonus 2018/19 outturn on page 101.

RoRE %(i) (ii)

15%

10%

6.3%

6.6%

10.8%

9.0%

11.1%

10.2%

8.1%

2015/16

2016/17

2017/18

2018/19

Severn Trent

UQ of WaSC’s

(i)

2017/18 figure restated to reflect Ofwat’s decision on supply interruptions in their Final Determination
of in-period ODIs for 2018.

(ii) Calculated in accordance with Ofwat methodology. UQ data is not yet available for the current year.

102

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Group financial statements
Company financial statements
Other information

Executive Director shareholdings
% of base salary

1,000

322%

800

600

400

200

443%

132%

443%

300%

200%

207%

231%

96%

207%

CEO

CFO

Shareholding requirement

Shares counting towards shareholding requirement(i)

Unvested subject to continued employment(ii)

Unvested subject to performance(iii)

(i)

Represents beneficially owned shares as well as shares held in trust as part of the annual bonus
deferred share awards (of which 50% are deducted to cover statutory deductions).

(ii) Represents 2016 LTIP shares which are subject to an ongoing vesting period plus shares held as part

of the Sharesave scheme.

(iii) Represents the 2017 and 2018 LTIP awards which are subject to ongoing performance.

All calculations in the above chart use a closing share price on 31 March 2019 of £19.76.

Overall link to remuneration and equity of the Executive Directors

2018/19
Single
Figure
(£’000s)

2,395.4
1,253.0

Shares held
at start of
year

Shares held
at end of
year

Value of
shares at
start of year

Value of
shares at
end of year

(£’000s)(i)

(£’000s)(ii)

103,274
23,464

137,349
32,075

£1,904.4
£432.7

£2,714.0
£633.8

Difference
(£’000s)

+£809.6
+£201.1

CEO
CFO

(i) Based on a closing share price on 31 March 2018 of £18.44.

(ii) Based on a closing share price on 31 March 2019 of £19.76.

Executive Director shareholdings

The CEO and CFO have exceeded the
shareholding requirements applicable in
2018/19 of 300% and 200% respectively
of salary.

Shareholding requirement

The minimum shareholding requirement
for Executive Directors, and the
current share interests of the Executive
Directors, take into account shares which
are owned outright or vested, shares
which are unvested and shares which are
subject to performance, and are set out
opposite. The shareholding requirement
must be built up over a five year period
and then subsequently maintained.
Further detail regarding the Executive
Directors’ outstanding shares awards
can be found on page 120.

Shares counting towards the
achievement of the guideline include
beneficially owned shares (including
shares held by connected persons) and
the net of tax value of deferred shares
under the annual bonus since they are
not subject to performance conditions.
The Executive Directors are expected to
retain all shares received through the
vesting of any incentive schemes (after
the settlement of any tax liability) until
the shareholding requirements are met.

Overall link to remuneration and
equity of the Executive Directors

As a Committee, we want to incentivise
Executive Directors to take a long-term,
sustainable view of the performance of
the Company. This is why, when we look
at the remuneration paid in the year, we
also look at the total equity they hold and
its value based on the performance of the
Company. The table sets out the number
of shares beneficially owned by the
Executive Directors at the beginning and
end of the financial year, and the impact
on the value of these shares taking the
opening and closing price for the year.

Severn Trent Plc Annual Report and Accounts 2019

103

Governance

Directors’ remuneration report continued
Remuneration

Summary of the Policy and implementation in 2018/19 and 2019/20

The Company’s Policy remains to attract,
retain and motivate its leaders and to
ensure they are focused on delivering
business priorities within a framework
designed to promote the long-term
success of Severn Trent, aligned with
shareholder interests.

The diagram below illustrates the
balance of pay and time period
of each element of the Policy for
Executive Directors.

Total pay

Fixed pay

Annual Bonus
(Malus and clawback provisions apply)

LTIP
(Malus and clawback provisions apply)

Year 1

Year 2

Year 3

Year 4

Year 5

Salary

Benefits,
Pension

50% in cash

50% in shares
3-year deferral period
No further performance conditions

Up to 200% salary
3-year performance period

2-year holding period
No further performance conditions

104

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

The table below sets out an overview of the key areas of the Policy and summarises how the Committee applied the Policy in
2018/19, together with details of how the Committee intends to implement the Policy in 2019/20.

Base Salary
To recruit and reward Executive Directors of a suitable calibre for the role and duties required.

Operation

Opportunity

Any increases will typically not be
higher than the average increases
for employees.
However, a higher increase may
be proposed in the event of a role
change or promotion, or other
exceptional circumstances.

Salaries are normally reviewed
annually on 1 July.
Salaries take account of:
– Individual performance;
– Experience and contribution;
– Developments in the relevant

employment market;
– Company performance

and affordability;
– Wider economic
environment; and
– Internal relativities.

How we implemented
the Policy in 2018/19

Executive Directors’
salaries increased by 2.5%
from 1 July 2018.
CEO – £708,000
CFO – £426,600
These rises were lower
than the general employee
salary increase.

How we plan to implement
the Policy in 2019/20

Executive Directors’
salaries increase by 2.4%
from 1 July 2019.
CEO – £725,000
CFO – £436,900
These rises are in line with the
general employee salary increase.

Benefits
To provide competitive benefits in the market to enable the recruitment and retention of Executive Directors.

How we implemented
the Policy in 2018/19

Normal company
benefit provision.

How we plan to implement
the Policy in 2019/20

No change.

Operation

Opportunity

The value of benefits is based
on the cost to the Company and
there is no pre-determined
maximum limit. The range and
value of the benefits offered are
reviewed periodically.

Benefits typically include car
allowance, family level private
medical insurance, life assurance,
personal accident insurance,
health screening, an incapacity
benefits scheme and other
incidental benefits and expenses.
In addition, Executive Directors
are eligible to participate in
all-employee share plans
on the same terms as other
eligible employees.

Pension
To provide pension arrangements comparable with similar companies in the market to enable the recruitment and retention
of Executive Directors.

Operation

Opportunity

A defined contribution scheme
and/or cash supplement in lieu
of pension.

For current Executive Directors,
the Company contribution
to a pension scheme and/or
cash allowance will be up to
a maximum of 25% of salary.
For any new recruit, the
contribution will be up to a
maximum of 15% of salary.
This is in line with the level
provided to the wider workforce.

How we implemented
the Policy in 2018/19

Executive Director current
pension arrangements for
2018/19 are as follows:
CEO – 25% of salary
CFO – 25% of salary

How we plan to implement
the Policy in 2019/20

No change for current Executive
Directors.

Severn Trent Plc Annual Report and Accounts 2019

105

Governance

Directors’ remuneration report continued
Remuneration

Annual bonus
To encourage improved financial and operational performance and to align the interests of Executive Directors with
shareholders through the partial deferral of payment in shares.

Operation

Opportunity

Maximum award of 120%
of salary.
There will be no payment made
for threshold performance.
50% of maximum will be paid
for target performance and
100% of maximum will be paid
for stretch performance.

Bonuses are based on financial,
operational and customer service.
50% of the bonus is paid in cash
and 50% is deferred into shares
for three years (with the value of
any dividends to be rolled up and
paid on vesting). There are no
further performance targets on
the deferred amount.
The performance measures and
targets for the annual bonus are
selected annually to align with
the business strategy and the key
drivers of performance set under
the regulatory framework.
Malus and clawback
provisions apply.

How we plan to implement
the Policy in 2019/20

No change to the maximum
bonus opportunity or payment
mechanisms of bonuses.
See page 97 for the Chairman’s
letter and description of changes
proposed to the operation of the
annual bonus for financial year
2019/20.
Performance measures
(as a % of maximum):
Group PBIT – 49%
Resilient Service ODIs – 35%:
• Customer (15%)
• Asset Health (10%)
• Environment (10%)
Customer Service – 8%
Health & Safety – 8%

How we implemented
the Policy in 2018/19

Maximum opportunities:
CEO – 120% of salary
CFO – 120% of salary
Performance measures
(as a % of maximum):
Regulated Water and
Waste Water PBIT – 47%
Business Services
PBIT – 10%
Customer ODIs – 20%
Health & Safety – 8%
Customer experience – 8%
Personal objectives – 7%

Executive Directors awarded
bonuses of:
CEO – 70.2% of salary
CFO – 70.2% of salary
Deferral of 50% of bonus earned.
See page 101 for further details
on outcomes.

LTIP
To encourage strong and sustained improvements in financial performance, in line with the Company’s strategy and long-term
shareholder returns.

How we implemented
the Policy in 2018/19

Grant levels:
CEO – 200% of salary
CFO – 150% of salary
The 2016 LTIP vested in the
year at 100%. See page 120
for further details.
See page 121 for details of the
RoRE target for the 2018 LTIP
awards granted in the year.

How we plan to implement
the Policy in 2019/20

No change to maximum
LTIP opportunities or the
performance conditions.
See page 107 for detail on
LTIP awards to be granted.

Operation

Opportunity

Maximum award opportunity
up to 200% of salary. Up to
25% of an award may vest for
threshold performance.

Awards are granted annually
and are subject to a three year
performance period.
RoRE is the sole performance
condition, with a stretch target
based on UQ performance.
RoRE is calculated as profit
after tax (plus incentives
earned in the year) divided by
the average equity proportion
of our regulatory capital value,
as prescribed by Ofwat.
Awards made to Executive
Directors are subject to a two
year holding period post-vesting
which continues to operate
post-cessation of employment.
Malus and clawback
provisions apply.
The value of dividends paid on the
shares comprising the award will
be rolled up and paid on vesting.

106

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Other information

Shareholding requirement
To encourage strong alignment between the interests of shareholders and Executive Directors.

Operation

The CEO is expected to build and maintain a holding of shares to
the value of 300% of salary, and other Executive Directors 200%
of salary.
Executive Directors are expected to retain all of the net of tax
number of shares they receive through the LTIP and deferred
share bonus until the shareholding requirement has been met.

How we implemented
the Policy in 2018/19

CEO – 300% of salary
CFO – 200% of salary
See pages 103 and 120 for
further details on shareholding
requirements and outstanding
share awards.

How we plan to implement
the Policy in 2019/20

No change to requirements.

LTIP awards to be granted in 2019

The table below describes how the LTIP will be implemented in 2019. The CEO’s award will be 200% of salary and the CFO’s
award will be 150% of salary. The RoRE performance condition that will be measured over three years, to 31 March 2022,
and corresponding vesting (as % of salary) will be:

Vesting for performance

Award

2019 LTIP
CEO
CFO

Threshold FD

% Salary
37.5%
25%

1.39 x FD

% Salary
150%
100%

UQ RoRE performance relative to WaSCs

% Salary
200%
150%

Chairman and Non-Executive Directors’ fees (audited)

Chairman’s fee
Fee paid to all Non-Executive Directors
Supplementary fees:
– Senior Independent Director
– Audit Committee Chairman
– Remuneration Committee Chairman
– Corporate Responsibility Committee Chair
– Treasury Committee Chairman

Fees
2019/20

Fees
2018/19

Increase %

£294,600
£56,450

£287,600
£55,100

£10,000
£15,000
£15,000
£13,000
£15,000

2.4%
2.4%

0.0%
0.0%
0.0%
0.0%
0.0%

Chairman and Non-Executive
Directors’ fees (audited)

From 1 April 2019, Non-Executive
Director fees were increased by
2.4% from £55,100 to £56,450, and
the Chairman’s fee was increased
by 2.4% from £287,600 to £294,600.
These increases are in line with the
general employee salary increase.

The current fee levels, and those for
the future financial year, are set out in
the table.

The Chairman, Senior Independent
Director and Non-Executive Directors
are appointed for a three year term,
subject to annual re-election by
shareholders following the annual
Board Effectiveness evaluation process.
This term can be renewed by mutual
agreement, up to a maximum total
tenure of nine years. The current Letters
of Appointment are available on the
Severn Trent Plc website.

The Chairman, Andrew Duff, will be
standing for re-election at the Company’s
forthcoming AGM on 17 July 2019 and, in
order to facilitate an effective succession
plan, it is intended that he remains as
Chairman until the announcement and
induction of his successor.

Severn Trent Plc Annual Report and Accounts 2019

107

Governance

Directors’ remuneration report continued
Remuneration

Employment at Severn Trent

• Pay Comparisons:

– Alignment with Group performance;

– Gender pay; and

– Social Mobility Index.

Communication with employees

To ensure the voice of our employees
is heard, we have an active Employee
Forum (‘the Forum’) that meets every
quarter to discuss business challenges
and opportunities. The Forum is chaired
jointly by a member of the Executive
Committee and the Trade Unions.
Members include representatives
from HR, joint Trade Unions and
employees from our other business
area employee forums.

The objectives of the Forum are to:

• Involve employees by sharing

information on the future of our
business and the water industry;

• Work together on issues that affect our

employees; and

• Work in partnership to deliver better
solutions to improve the way we work.

During 2018/19, the CEO discussed
the performance of the business with
the Forum, together with key financial
information and ideas for efficiencies.

Top 50 Best Places to Work

Severn Trent Plc has been honoured
with a Glassdoor Employees’ Choice
Award, recognising the Best Places
to Work in 2019, based solely on
the input of employees, who elect
to provide feedback on their jobs,
work environments and companies
through Glassdoor.

We have taken the opportunity to create
a new section in this report which brings
visibility of remuneration across the
entire workforce together in one place.

Creating an awesome place to work
is one of our key strategic priorities,
and one of the ways in which we aim to
achieve this is through a diverse and
inclusive working environment, and by
rewarding our employees throughout
the organisation in a fair manner.
In making decisions on executive
pay, the Committee considers wider
workforce remuneration and conditions,
and we believe that it is important to
be transparent about the link between
the two.

As part of our commitment to fairness,
we have included in this section more
information on our remuneration
principles, wider workforce pay
conditions, the Committee’s remit,
our Gender Pay statistics and
how remuneration aligns with
Group performance.

The Committee ensures that pay is fair
throughout the Company and makes
decisions in relation to the structure of
executive pay in the context of the wider
workforce remuneration and the cascade
of incentives throughout the business.
The Committee’s remit extends down to
Executives and senior management for
which it recommends and monitors the
level and structure of remuneration.

This section of the report covers
the following:

• Communication with employees;

• Severn Trent’s

Remuneration Principles;

• Wider workforce considerations

and approach to fairness, including
diversity and inclusion policies;

• Introduction to wider Committee remit

and the Committee’s report:

– On wider workforce pay policies and
whether the approach to executive
remuneration is consistent; and

– On the alignment of the incentives
operated by the Group with its
culture and strategy.

The Chairman and CEO regularly attend
the Forum and in the coming year
the Committee Chairman, and other
Non-Executive Directors will attend.
The Forum provides the opportunity for
the Board to meet employees across
the Severn Trent Group and enables
their views to be fully considered at
Board level. Individual Directors provide
feedback to the Board at each meeting.

The Board also receives feedback from
the ‘Ask Liv’ section on the intranet.

Remuneration principles

Our reward strategy is designed to
support and reinforce Severn Trent’s
purpose, vision and values and to reward
all of our employees for delivering
against our strategic objectives. We have
updated our remuneration principles to
support the next phase of our strategic
development. The principles that
we have developed apply across the
Group and are cascaded throughout
the organisation.

The 2018 Code requires the Committee
to determine the Policy and practices
for Executive Directors in line with a
number of factors set out in Provision 40,
and further details on our remuneration
principles and how we have addressed
the requirements are set out on
page 109.

“For employers, we know that a
satisfied and engaged workforce
helps drive financial performance.
Glassdoor Best Places to Work
winners are strategically investing
in company culture, career
growth opportunities and more,
which also serves as a major
recruiting advantage,” said Dr.
Andrew Chamberlain, Glassdoor
Chief Economist.

When sharing a company review on
Glassdoor, employees are asked
to rate their satisfaction with the
company overall, and key workplace
factors like career opportunities,
compensation and benefits, culture
and values, senior management and
work/life balance.

108

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Strategic report
Governance
Group financial statements
Company financial statements
Other information

Our purpose: To serve our communities and build a lasting legacy

Our vision: To be the most trusted water company by 2020

How do we embed our purpose and vision in our remuneration guiding principles?

Our remuneration principles

Support our purpose,
vision and values
and our wider
business goals

Drive long-term
sustainable performance
for the benefit of all our
customers, shareholders
and wider stakeholders

Be simple,
transparent and
easily understood
by internal and
external stakeholders

Encourage our
employees to think
and act like owners
in the business

Attract, motivate
and retain all our
employees with diverse
backgrounds, skills and
capabilities

How does the Committee address the requirements under Provision 40?

Cultural alignment and
proportionality
• The Committee ensures
that the overall reward
framework embeds
our purpose, vision
and values

• The Committee reviews
the executive reward
framework regularly
to ensure it supports
the Company’s
strategic objectives

Proportionality and risk
• A significant proportion

of remuneration is
delivered in variable pay
linked to corporate
performance

• Performance measures/
targets for incentives are
objectively determined

• Outcomes under

incentive plans are based
on holistic assessment
of performance

Simplicity, clarity and
predictability
• The Committee

ensures the highest
standards of disclosure
to our internal and
external stakeholders
• The Committee makes
decisions on executive
pay in the context of
all employees and the
external environment

Cultural alignment
and risk
• The Committee ensures
that a significant portion
of reward is equity-
based and thereby linked
to shareholder return
• Executives are required

to build significant
personal shareholdings
in the Company and this
is regularly monitored by
the Committee

Clarity
• The Committee

ensures that Executive
Directors are provided
with a remuneration
opportunity which is
competitive against
companies of a similar
size and complexity, with
a strong emphasis on the
variable elements

Alignment of the Policy to the Provisions of the 2018 Code

Clarity

The Company’s performance remuneration is based on supporting the implementation of the Company’s strategy
measured through KPIs which are used for the Annual Bonus and LTIP. This provides clarity to all stakeholders on the
relationship between the successful implementation of the Company’s strategy and the remuneration paid.

Simplicity

The Company operates a UK market standard approach to remuneration which is familiar to all stakeholders.

Risk

The Policy includes the following:
• Setting defined limits on the maximum awards which can be earned;
• Requiring the deferral of a substantial proportion of the incentives in shares for a material period of time, helping to
ensure that the performance earning the award was sustainable, and thereby discouraging short-term behaviours;

• Aligning the performance conditions with the agreed strategy of the Company;
• Ensuring a focus on long-term sustainable performance through the LTIP; and
• Ensuring there is sufficient flexibility to adjust payments through malus and clawback and an overriding discretion to

depart from formulaic outcomes, especially if it appears that the behaviours giving rise to the awards are inappropriate
or that the criteria on which the award was based do not reflect the underlying performance of the Company.

Predictability

Shareholders were given full information on the potential values which could be earned under the Plans on their approval.
In addition, all the checks and balances set out above under ‘Risk’ were disclosed at the time of shareholder approval.

Proportionality The Company’s incentive plans clearly reward the successful implementation of the strategy, and through deferral and
measurement of performance over a number of years ensure that the Executive Directors have a strong drive to ensure
that the performance is sustainable over the long term. Poor performance cannot be rewarded due to the Committee’s
overriding discretion to depart from the formulaic outcomes under the incentive plans if they do not reflect underlying
business performance.

Alignment
to culture

A key principle of the Company’s culture is a focus on customers and their experience; this is reflected directly in the type of
performance conditions used for the bonus. The focus on ownership and long-term sustainable performance is also a key
part of the Company’s culture. In addition, the measures used for the incentive plans are measures used to determine the
success of the implementation of the strategy.

Severn Trent Plc Annual Report and Accounts 2019

109

Governance

Directors’ remuneration report continued
Remuneration

Wider Workforce considerations
and our approach to fairness

Pay and alignment
We recognise the central importance of
all of our teams in delivering success
and, as such, we seek to create an
inclusive working environment, to reward
our employees in a fair and equitable
manner, and to provide fulfilling
careers. We do this by providing all our
employees with:

Eligibility

All employees

Number of
employees covered

Remuneration
element

Details

6,872
(as at 31 March 2019)

Salary

Benefits

Pension

Annual bonus

SAYE

LTIP
A proportion of
this population
participate in the
LTIP by annual
invitation
Shareholding
guidelines as a
% of salary
CEO – 300%
CFO – 200%
Exec Co – 100%

Management
and senior
management

374

Executive Committee
and Executive
Directors

Salaries are set to reflect market value of the role, and to aid
recruitment and retention.
Employees who are not on a training rate of pay (such as apprentices)
receive at least the voluntary Living Wage. We also monitor closely
the rates of pay of people who are training with us to make sure they
remain fair and competitive.
All employees are eligible to participate in our flexible benefits scheme
which we believe is one of the best in the industry and which is designed
to support a positive work-life balance.
45% of our employees choose to tailor their benefits via our flexible
benefits scheme. They have also saved a total of £56,309 through our
employee discount partnerships since the scheme was launched.
We offer a market leading defined contribution pension scheme and
double any contributions that employees make (up to a maximum of 15%
of salary), regardless of level or seniority. When colleagues get closer to
retirement, we provide education and support to help plan for the next
stage of their lives.
We are proud that 98% of our employees are members of the pension
scheme and 57% pay contributions above the minimum of 3%.
All of our people share in our success by participating in our all-
employee bonus plan, ensuring all employees are aligned with the same
measures and rewarded for achieving our key objectives.
For this year the bonus paid out £909 to our frontline employees
in Severn Trent Water Limited and Hafren Dfyrdwy. New starters,
post 2 January 2019, were not eligible to receive a bonus.
Offering the opportunity to participate in our Sharesave scheme
encourages employee engagement and reinforces our strong
performance culture, enabling all employees to share in the
long-term success of the Company whilst also aligning participants
with shareholder interests.
Nearly 70% of our employees are active participants in our Sharesave
scheme which gives employees an opportunity to save up to £500 per
month over three to five years, with the option to buy Severn Trent Plc
shares at a discounted rate at the end of the period.
The LTIP reinforces delivery of long-term creation of value and sector
outperformance.
The retention of shares by Executive Directors for the longer term
also supports a shared ownership culture in the Group.

Supports alignment of Executives’ interests with shareholders.

110

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Strategic report
Governance
Group financial statements
Company financial statements
Other information

Our Social Purpose

We are proud to be recognised as the
first socially purposeful Company in
the utility sector. Read more in our
Social Purpose Chapter on page 6.
Our employees tell us we are doing
well on diversity and inclusion
through great scores in our employee
engagement survey but we know there
are further opportunities to reflect the
demographics of our region.

As a result, we remain strongly
committed to the long-term sustained
development of our employees and
communities through our evolving
diversity and inclusion policies.

The diagram below summarises some
of our activities and accomplishments
in this area:

Do more to support our development
and wellbeing

Recognise and fairly reward
everyone’s contribution

£10m

Investment in the
Severn Trent Academy
supporting development
of colleagues at all
stages of their careers,
from foundation
apprenticeships and
graduate entrants
through to higher
and degree level
apprenticeships and
Masters degrees

240

Menopause awareness
programme, so far over
240 employees have
attended our menopause
workshops, 10% of whom
were male

LGBT+ Ally campaign
and Pride

Our 2019 starting
rates are c.£16,000
for Apprentices,
£16,900 pro rata
for Undergraduate
Placements and
c.£27,000 for Graduates

Fairness, transparency
and alignment runs
through our entire
customer focused
bonus scheme from
the top to the bottom
of the Company

Provide everyone the opportunity to succeed
in a job that the community depends upon

Be a company that we’re
inspired to work for

2 days

To enable employees
to participate in
volunteering programmes,
and a third of our
employees took this up

Visited 24 schools
and colleges in social
mobility cold spots

Employability scheme
to support people with
learning difficulties to
gain work experience
and skills

Our graduate scheme
has a Black, Asian and
Minority Ethnic (‘BAME’)
representation of 31%, with
the equivalent figure for
our apprentices being 12%

Top 4

The top 4 for women’s
representation amongst
Executive Committee and
their direct reports within the
FTSE100 recognised in the 2018
Hampton-Alexander Review

Top 50

62%

Employee engagement
which is 5 points ahead
of the UK and Ireland
average benchmark

93%

Trusted to
do my job

92%

Proud to be part
of Severn Trent

Severn Trent Plc Annual Report and Accounts 2019

111

Governance

Directors’ remuneration report continued
Remuneration

Gender Pay Gap Reporting

Gender pay reporting legislation
came into force in April 2017 and
requires all UK employers with 250
or more employees to publish annual
information illustrating pay differences
between male and female employees.
At Severn Trent, we are passionate about
equality, diversity and inclusion and are
committed to addressing our Gender
Pay Gap.

We reported our Gender Pay Gap in
November 2018 in line with statutory
requirements. The data was based on
figures from 5 April 2018 and showed
a mean gap of 2.8% (last year 2.4%)
and a median gap of 13.2% (14.6%).
The increase in the mean reflects small
changes in the number of men and
women within our executive population,
and the decrease in the median is
primarily driven by a higher proportion
of females being recruited and promoted
within our senior managerial population.

We continue to encourage and embrace
diversity, and are always looking
at ways in which we can build our
inclusive approach.

The full Gender Pay Gap report
can be found on the Severn Trent
website, detailing the methodology
and definitions, including case studies
showcasing the achievements of two
of our employees, and information
about our trailblazing menopause
awareness campaign.

Pay quartiles

72.4%

Top
quartile

27.6%

80.5%

Upper middle
quartile

19.5%

70.8%

Lower middle
quartile

29.2%

57.1%

Lower
quartile

42.9%

The difference in hourly pay between men and women is

2.8%

Mean

13.2%

The difference in annual bonus pay between men and women is

-50%

Median

3.9%

112

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

Social Mobility Employer
Index 2018

We were ranked as one of the Top
50 employers in the Social Mobility
Employer Index 2018 (‘the Index’).
The Index ranks participating employers
on their actions to access and progress
talent from all backgrounds, and
showcases their progress towards
improving social mobility.

Having a workforce that is diverse
in terms of social background is as
important to Severn Trent as being
diverse in terms of gender and race, and
the Index has assessed us on the actions
we are taking to ensure we are open to
accessing and progressing talent from
all backgrounds.

Our ranking has increased from 38th
to 20th in the Index due to the work we
have already undertaken in this area to
enable those from lower socio-economic
backgrounds to succeed. Measures taken
to improve social mobility include:

• Targeting our outreach work at schools

with above-average levels of free
school meals/low levels of attainment
with a focus on Social Mobility
Cold Spots;

• Unlike many other organisations,
which offer apprenticeships at
levels two and three, we offer higher
apprenticeships; and

• Removing the name, grades and

university attended from all stages
of the recruitment process for
our graduate and apprenticeship
programmes. As a consequence, offers
were made to individuals who would
probably not have been recruited under
the previous grade requirements.

We also signed the Social Mobility Pledge
in 2019, which encourages companies
to improve the UK’s record on social
mobility. As part of this, we will:

• Partner with schools and colleges

to provide coaching through
quality careers advice, enrichment
experiences and by mentoring people
from disadvantaged backgrounds
or circumstances;

• Provide structured work experience
and/or apprenticeship opportunities
to people from disadvantaged
backgrounds or circumstances; and

• Adopt open employee recruitment
practices which promote a level
playing field for people from
disadvantaged backgrounds
or circumstances.

Severn Trent Plc Annual Report and Accounts 2019

113

Governance

Directors’ remuneration report continued
Remuneration

Remuneration element

Details reviewed

Salary

Bonus

Long Term
Incentive Plan

Pension

Salary rises
General positioning of base salary against market
Total eligible population (% of Group employees)
Target and maximum range (% of Salary)
Performance conditions in place across the Group
Method of payment – cash or shares
Recovery provisions in place (malus and clawback)
Total eligible population (% of Group employees)
Target and maximum range (% of Salary)
Type of performance conditions
Holding period
Minimum shareholding requirement
Recovery provisions (malus and clawback)
Defined Contribution
Total eligible population
Group contribution
% – Range of values
For new EDs and existing EDs
Employee contribution
Defined Benefit
Total eligible population
Range of values

Introduction to Committee remit
and the Committee’s report

Process
In order for the Committee to carry out
its oversight review of wider workforce
pay and policies and incentives, a specific
process is being developed. This section
provides some detail on how the
Committee will carry out its duties and
the key issues that will be considered.

The Committee will receive a report
twice a year from the Group setting out
key details of remuneration throughout
the Group. The table sets out a summary
of the information that will be received
and discussed by the Committee at the
end of the financial year.

Levels of remuneration and the types
offered will vary across the Group
depending on the employee’s level of
seniority and role. The Committee is not
looking for an homogeneous approach
but, when conducting its review, it
will pay particular attention to the
following issues:

• Whether the element of

remuneration is consistent with the
Remuneration Principles;

• Whether any differences are objectively

justifiable; and

• Whether the approach seems fair
and equitable in the context of
other employees.

Once the Committee has conducted
its review of the wider workforce
remuneration and incentives, it will
consider the approach applied to the
remuneration of the Executive Directors
and senior management. In particular,
the Committee is focused on whether,
within the framework set out above,
the approach to the remuneration of
the Executive Directors and senior
management is consistent with that
applied to the wider workforce.

The first report, as described above, is
due to be considered by the Committee
later in 2019. Details of the findings on
the alignment of pay across the Group
will be communicated to employees and
reported on in next year’s Directors’
remuneration report.

114

Severn Trent Plc Annual Report and Accounts 2019

Pay comparisons

Our policy quantum compared
with peers
The following table shows the relative
position of target total compensation
under the policy for our Executive
Directors compared with the
FTSE51-150.

When we set the remuneration for the
Executive Directors, one of the factors
the Committee considers is the relevant
market for Executive Directors, which
we believe is the FTSE51-150, and the
size of the Company compared with
these peers. The Company is around
the median of this comparator group by
market capitalisation and the proposed
target total compensation has been set
broadly in line with this position.

CEO remuneration vs returns
to shareholders
The graph shows the value at 31 March
2019 of £100 invested in Severn Trent
Plc on 1 April 2009 compared with
the value of £100 invested in the FTSE
100 index. The FTSE100 was chosen
as the comparator index because the
Company is a constituent of that index.
The intermediate points show the value
at the intervening financial year ends.

Total shareholder return
The chart shows the value at 31 March
2019 of £100 invested in Severn
Trent at the start of the current AMP.
The intermediate points show the value
at the intervening financial year ends.

Strategic report
Governance
Group financial statements
Company financial statements
Other information

Relative position of target total compensation

Positioning of total remuneration of Company relative to market benchmarks

CEO

CFO

Bottom quartile

3rd quartile

2nd quartile

Top quartile

Total shareholder return and total remuneration

Severn Trent Plc TSR

FTSE 100 index TSR

CEO total remuneration (£’000)

)
£
(
n
r
u
t
e
r
r
e
d
l
o
h
e
r
a
h
s
l
a
t
o
T

400

350

300

250

200

150

100

Source: Datastream

)
0
0
0
’
£
(
n
o
i
t
a
r
e
n
u
m
e
r
l
a
t
o
t
O
E
C

3,000

2,500

2,000

1,500

1,000

500

Total shareholder return and total remuneration
2015

2009

2014

2013

2010

2012

2011

2016

2017

2018

2019

Severn Trent Plc TSR

FTSE 100 index TSR

CEO total remuneration (£’000)

Source: Datastream

3,000

Source: Datastream

2,500

400

Total shareholder return over AMP

350

Total shareholder return over AMP

Severn Trent Plc TSR

)
£
(
n
r
u
t
e
r
r
e
d
l
o
h
e
r
a
h
s
l
a
t
o
T

300

140

250

120

200

100

150

80
100

2,000

1,500

1,000

500

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

)
0
0
0
’
£
(
n
o
i
t
a
r
e
n
u
m
e
r
l
a
t
o
t
O
E
C

Total shareholder return over AMP

2015

2016

2017

2018

2019

Severn Trent Plc TSR

Source: Datastream

Severn Trent Plc Annual Report and Accounts 2019

140

120

100

115

2015

2016

2017

2018

2019

Governance

Directors’ remuneration report continued
Remuneration

Remuneration of the CEO

The figure of remuneration for the CEO over the last 10 financial years is shown in the table below. The annual bonus payout
and LTIP vesting level as a percentage of the maximum opportunity is also shown.

CEO
Total remuneration(i)
(£’000)
Annual bonus
(% of maximum)
LTIP vesting
(% of maximum)
SMP vesting
(% of maximum)

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Tony Wray

Tony Wray Liv Garfield Liv Garfield Liv Garfield Liv Garfield Liv Garfield

Year ended 31 March

1,027.0

949.8

1,244.1

1,635.3

1,818.4

2,197.6

2,493.6

2,424.0

2,193.5

2,395.4

51.5%

43.2%

48.1%

82.4%

78.7%

52.0%

88.2%

75.8%

72.5%

70.2%

60.3%

0.0%

28.4%

57.5% 100.0% 100.0% 100.0% 100.0% 100.0%

100%

N/A

78.0%

64.3%

N/A

(i) 2018 onwards includes any SAYE grants made during the year as well as dividend equivalents in respect of vested LTIP shares.

Percentage change in the remuneration of the CEO

2018/19
£’000

2017/18
£’000

708.0

17.1

497.0

690.6

17.7

501.0

CEO

Change

2.5%

(3.4)%

(0.8)%

Average per employee

2018/19
£’000

31.8(iv)

0.4

1.7

2017/18
£’000

30.5

0.4

1.8

Change

4.3%

(5.6)%

– Salary(i)

– Benefits(ii)

– Bonus(iii)

(i)

The salary figures shown are based on full time equivalent comparisons.

(ii)

The benefits figures include car allowance and family level private medical insurance for senior and
middle managers.

(iii) The figures shown are reflective of any bonus earned during the respective financial year.

Bonuses are paid in the following June.

(iv)

The average pay increase for the wider workforce during the year was 3.0%.

Percentage change in the
remuneration of the CEO

The table shows the movement in salary,
benefits and annual bonus for the CEO
between the current and previous
financial year compared with that of the
average employee. The Committee looks
to ensure that the approach to fair pay
is implemented in practice throughout
the Group.

The Committee has elected to use the
average earnings per employee as this
avoids the distortions that can occur to
the Group’s total wage bill as a result of
movements in the number of employees.
The comparator group used is Severn
Trent employees in the UK.

The Committee monitors this
information carefully to ensure that
there is not a divergence in the fixed
pay of the CEO compared with the wider
workforce. In addition, this information
demonstrates the Company’s approach
to bonus throughout the organisation
with employees and the CEO benefiting
when the Company does well.

116

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

Annual Report on Remuneration

The Annual Report on Remuneration and
the Annual Statement will be put to an
advisory shareholder vote at the AGM on
17 July 2019. The information on pages
117 to 122 is audited.

Total single figure of remuneration
(audited)
The total single figure of remuneration
table below sets out the remuneration
received by the Directors for
2018/19 (or for performance periods
ending in 2018/19 in respect of the
long-term incentives) and, for the
purposes of comparison, for 2017/18.
Where necessary, further explanations of
the values provided are included below.
This table and the explanatory notes
below this table have been audited.

Total single figure of remuneration (audited)

Executive
Directors

Liv Garfield
James
Bowling

Non-Executive
Directors

Andrew Duff
(Chairman)
John Coghlan
Philip
Remnant
Kevin
Beeston
Dominique
Reiniche
Dame Angela
Strank

Salary
and
fees
(£’000)(i)

703.7

424.0
Salary
and
fees
(£’000)

287.6
85.1

70.1

65.1

55.1

68.1

Year ended 31 March 2019

Year ended 31 March 2018

Benefits

(£’000)(ii)

Annual
bonus
(£’000)(iii)

LTIP
(£’000)(iv)

Pension

(£’000)(v)

Other
(£’000)(vi)

Total
(£’000)

Salary
and fees

Benefits

(£’000)(i)

(£’000)(ii)

Annual
bonus
(£’000)(iii)

LTIP
(£’000)(iv)

Pension

(£’000)(v)

Other
(£’000)(vi)

Total
(£’000)

17.1

497.0 1,001.7

175.9

–

2,395.4

687

16.5

299.5

402.5

106.0

4.5

1,253.0

414

501

811

172

4.5

2,193.5

302

319

104

–

1,157.8

Benefits
(£’000)

Annual
bonus
(£’000)

LTIP
(£’000)

Pension
(£’000)

Other
(£’000)

Total
(£’000)

Salary
and fees
(£’000)

Benefits
(£’000)

Annual
bonus
(£’000)

LTIP
(£’000)

Pension
(£’000)

Other
(£’000)

Total
(£’000)

–
–

–

–
–

–

–
–

–

–
–

–

–
–

–

287.6
85.1

281
84

70.1

65.1

55.1

68.1

–
–

–

–
–

–

–
–

–

–
–

–

–
–

–

281
84

(i)

(ii)

Salaries are shown before the deductions of benefits purchased through the Company’s salary sacrifice scheme, such as pension contributions via salary
sacrifice. Salary is based on salary earned during the financial year.

Benefits include a car allowance of £15,000 p.a., family level private medical insurance, life assurance worth six times salary and participation in an incapacity
benefits scheme.

(iii) The annual bonus is paid 50% in cash and 50% in shares with the portion deferred into shares subject to continued employment for three years but with no

further performance conditions attached.

(iv)

The value of the 2016 LTIP is based on the estimated value of shares calculated using the average share price for the period 1 January to 31 March 2019 of
£19.80 and includes dividends paid to date. The prior year LTIP figure has been restated using the share price at the date of vesting and includes dividend
equivalents in respect of vested shares.

(v)

The Executive Directors’ pension provision is equal to 25% of salary. No Executive Directors accrued benefits under any defined contribution pension plans
during the year or have participated in a defined benefits scheme while an Executive Director.

(vi)

This figure relates to the difference between the market price and the discounted option price relating to an SAYE option granted during the financial year.

Relative importance of the spend on pay
The table below shows the expenditure
of the Company on staff costs against
dividends paid to shareholders for both
the current and prior financial periods,
and the percentage change between the
two periods.

Relative importance of the spend on pay

Staff costs(i)
Dividends

(i) Staff costs from continuing operations.

2019
£m

309.4
211.9

2018
£m

288.1
197.0

% Change

7.4%
7.6%

Severn Trent Plc Annual Report and Accounts 2019

117

Governance

Directors’ remuneration report continued
Remuneration

Benefits for 2018/19 (audited)

The value of benefits is based on the cost to the Company and there is no pre-determined maximum limit. The range and value of
the benefits offered is reviewed periodically. In line with the Policy outlined on page 105, we show below the benefits received by
the individual Executive Directors in the year, and their typical annual value where possible.

Benefits for 2018/19 (audited)

Car allowance
Private medical insurance
Life assurance
Personal accident cover
Biennial health screening
Incapacity benefits(i)

Typical
annual value
2018/19
£15,000
£1,500
Up to 6 x salary
As per the Group-wide policy
£581 per health screen
Worth 75% of salary for a period of five
years (subject to qualifying criteria)

Typical
annual value
2017/18
£15,000
£1,500
Up to 6 x salary
As per the Group-wide policy
£620 per health screen
Worth 75% of salary for a period of five
years (subject to qualifying criteria)

Percentage
increase/
(decrease)
0%
0%
0%
0%
(6.3)%
0%

(i) Incapacity benefit for Executive Directors and senior management is 75% of salary, and for the rest of the eligible workforce is 50% of salary.

Annual bonus outturn for 2018/19

Full detail on the Company’s
performance during the financial year
can be found in the Strategic report.

The performance outcomes in respect of
financial performance conditions, and the

overall bonus awarded to each Executive
Director, is set out in the At a Glance
section on page 100. The table provides
detail on the performance outcomes for
both Executive Directors in relation to
their specific personal objectives.

Personal objectives for the Executive
Directors continue to be linked to our
strategic framework and were shared
across the team, with each Executive
Director leading on the areas which
best align to their accountabilities
and expertise.

CEO

Objective
and activity

Embed customers
at the heart of all we do

Deliver on customer
measures through
customer ODIs

Drive operational
excellence and
continuous innovation

Deliver UQ plans
across Waste,
Water and Retail

Invest responsibly
for sustainable growth

Achieve material
improvements in some of our key
Board and STEC level Enterprise
Risk Management (‘ERM’) risks

Change the market
for the better

Produce compelling
cases for investment at
PR19 that enable strong
Regulatory Capital Value (‘RCV’)
growth over AMP7 and AMP8

Create an awesome
place to work

Continue on improving
overall QUEST
engagement scores

Key achievements
in 2018/19

• Achieved customer ODI uncapping enabling benefits of outperformance to be shared

with customers.

• 40% year-on-year improvements in Supply Interruptions.
• Ofwat approved waste uncapping benefiting the remainder of AMP6.
• Supported 52,838 vulnerable customers.
• Retained UQ for Customer Service Index for 2018/19.

Performance
outcome

Fully met

• Significant improvements have been made in waste networks ODIs during AMP6,

including 50% reduction in total flooding incidents (internal and external), and year-
on-year reduction in the number of Cat3 pollutions.

Fully met

• Delivery of 2018 Agrivert acquisition.
• Significant improvements in leakage year on year, including leakage work in progress

down by 65% and a 50% improvement in the median no. of days to fix a leak.

• New customer first programme rolled out to all Contact Centre staff.

Taken actions to reduce risk scores across a range of areas through reviewing and
embedding control and assurance frameworks, additional infrastructure investment
and identification and implementation of remedial plans.

Fully met

• PR19 fast-tracked.
• Only utility to be named as a Pathfinder by The Purposeful Company.

Fully met

• Overall QUEST score held flat in spite of exceptional work effort and unprecedented

external factors affecting normal day-to-day working. We are five points above the UK
and Ireland benchmark.

Fully met

• Social Mobility Employer Index ranking increased from 38th to 20th.

118

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

CFO

Objective
and activity

Embed customers
at the heart of all we do

Support customer ODIs

Drive operational
excellence and
continuous innovation

Continue the evolution
of regulatory submissions
and building financial resilience

Invest responsibly
for sustainable growth

Support effective
decision-making in Capital
Delivery, delivering efficiencies
and effective resource allocation

Change the market
for the better

Deliver Finance plan
for PR19, and an excellent
assurance programme
for PR19 submission

Create an awesome
place to work

Develop breadth and
depth of experience
and expertise across
whole Finance team

Key achievements
in 2018/19

• Identified and made improvements in reporting and analysis, enabling management

to have greater insight when making in-year decisions.

• Ofwat approved waste uncapping benefiting the remainder of AMP6.

• Produced high quality Annual Performance Reports for both Severn Trent Water

and Hafren Dyfrdwy.

• Embedded robust financial resilience processes, e.g. early adoption of Ofwat’s

proposed stress testing scenarios for PR19.

• Implemented improved capital governance model, enabling more efficient project

resource allocation.

• Successful creation of £100m ‘Spend to Save’ capital fund targeted at operational

efficiencies for AMP7.

• Created cost-effective Assurance plan as part of PR19 submission, and
achievement of fast-track status has enabled early implementation.

• Launched Finance for the Future model designed to improve effectiveness,
embrace innovation and drive efficiency towards AMP7 Totex challenges,
supported by an award winning study programme for future talent (graduates
and apprentices).

Performance
outcome

Fully met

Severn Trent Plc Annual Report and Accounts 2019

119

Governance

Directors’ remuneration report continued
Remuneration

LTIP awards vesting in relation to performance in 2018/19 (audited)
The table below shows the outcome in respect of the 2016 LTIP awards, granted on 21 June 2016, which had performance periods
ended 31 March 2019 and indicates the resulting number of shares vesting and their value. The LTIP based on RoRE over the three
years to 31 March 2019 will vest in full. This is representative of continued solid performance in customer ODIs, financing and
Totex. Detail on the performance outcome is given in the At a Glance section on page 102.

LTIP awards vesting in relation to performance in 2018/19 (audited)

Number
of shares
granted
46,115
18,529

Value of
award at
grant
(£’000)
£995.6
£400.0

End of
performance
period
31/03/19
31/03/19

% award
vesting
100%
100%

Number of
shares
vesting
46,115
18,529

Vesting
date
21/06/19
21/06/19

Executive
CEO
CFO

Value
attributable
to share
price
movement
(£’000)
£0
£0

Value of
LTIP shares
vesting(i)
(£’000)
£913.2
£366.9

Value of
dividend
equivalents
due on
vesting
shares(ii)
(£’000)
£88.5
£35.6

Total value
of LTIP
(Single
Figure)
(£’000)
£1,001.7
£402.5

The RoRE calculation used for LTIPs differs slightly from that used in the Annual Performance Report, which uses the Ofwat definition. The LTIP measure seeks to
align better our LTIP targets to actual cash flows and against a clearly defined target. In this measure, financing outperformance is based on actual gearing rather
than the notional capital structure and compares our cost of debt against the allowance in the Ofwat Financial Model. It includes profits/losses associated with
land sales, miscellaneous activities and the impact of the wholesale revenue forecasting incentive mechanism.

(i)

Based on the average share price over the final three months of the performance period £19.80 as the awards will not be released until after the end of the closed period.

(ii) Based on dividends paid in the period since date of grant to 31 March 2019.

Payments for loss of office
There were no payments for loss of office in the year.

Payments to past Directors (audited)

Emma FitzGerald
Full details of Emma FitzGerald’s unvested shares under the deferred Annual Bonus Scheme and LTIP awards can be found in the
2017/18 Directors’ remuneration report. The table below sets out details of the LTIP award which will be released to her on the
ordinary vesting date, 21 June 2019. She will also receive dividend equivalents on the vested shares.

Award
2016 LTIP

End of performance period
31 March 2019

Number of shares
11,243

Outstanding scheme interests, including share awards granted during the year (audited)

The table below sets out details of the Executive Directors’ outstanding share awards as at 31 March 2019.

Directors’ shareholdings and summary of outstanding share interests (audited)

Executive
Liv Garfield

James Bowling

Maximum
number of

shares(ii)
46,115
16,260
42,383

Percentage
vesting at
threshold
performance
25%
–
25%

Exercise
price
(pence)
–
–
–

End of
performance
period
31/03/19
31/03/16
31/03/20

12,850
1,089

72,880
13,394
204,971
18,529
9,634
1,044
17,028
7,693
32,941
8,072
1,221
96,162

–
–

25%
–

25%
–
–
25%
–
25%
–
–

–
1,652

–
–

–
–
1,724
–
–
–
–
1,474

31/03/17
–

31/03/21
31/03/18

31/03/19
31/03/16
–
31/03/20
31/03/17
31/03/21
31/03/18
–

Award type (i)
2016 LTIP
2016 ABS
2017 LTIP

2017 ABS
2018 SAYE

2018 LTIP
2018 ABS
Total
2016 LTIP
2016 ABS
2016 SAYE
2017 LTIP
2017 ABS
2018 LTIP
2018 ABS
2019 SAYE
Total

Awards granted during the year

End of
holding
period

Vesting/
exercise

date(iii)

Basis of award

– 21/06/19
– 28/06/19
– 20/06/20

– 28/06/20
– May-21

–

24/07/23 24/07/21

200% of salary
– 19/06/21 Deferred bonus

Face value
(£’000)

–

£1,381
£250.5

– 21/06/19
– 28/06/19
May-19
–
– 20/06/20
– 28/06/20
24/07/23 24/07/21

–

150% of salary
– 19/06/21 Deferred bonus
–
– May-22

£624.3
£151.0
–

Notes
(a)
(c)
(a)

(b)
(c)

(a)
(c)
(d)
(a)
(c)
(b)
(c)
(d)

(i)

LTIP awards are conditional share awards subject to performance conditions. ABS awards are deferred shares which are not subject to further
performance conditions.

(ii) Additional dividend equivalent shares may be released where provided in the rules.

(iii) Awards that are due to vest in a closed period will be released as soon as practicable after the end of the closed period.

120

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

2016 and 2017 LTIP awards

Award

Grant date

2016 LTIP
2017 LTIP

21/06/2016
20/06/2017

Threshold
vesting FD
(Baseline)

5.65%
5.65%

Full vesting
(Outperformance)

x1.39 (equivalent to 7.86%)
x1.39 (equivalent to 7.86%)

3 day average
share price
used for grant
calculations

£21.59
£23.96

2018 LTIP award (awards granted during the year)

Award

Grant date

Threshold
vesting FD
(Baseline)

1.39x FD

Full vesting
(Outperformance)

2018 LTIP

24/07/18

5.65%

Equal to 7.86%

UQ RoRE
compared to
WaSCs

3 day average
share price
used for grant
calculations

£18.95

Deferred shares under the annual bonus scheme
(including awards granted during the year)

Award

2016 ABS
2017 ABS
2018 ABS

Relating to FY

15/16
16/17
17/18

Grant date

28/06/16
28/06/17
19/06/18

3 day average share price
used for grant calculations

£21.59
£23.96
£18.70

a) 2016 and 2017 LTIP awards
All of the LTIP awards are subject to a
RoRE performance condition measured
over three financial years, and average
RoRE performance is compared with the
baseline figure set by Ofwat in our FD.

The award will vest at threshold (25%)
if average RoRE matches the baseline
figure, and increases on a straight-
line basis to full vesting (100%) for
outperforming the baseline.

b) 2018 LTIP award (awards granted
during the year)
In 2018, the LTIP maximum opportunity
changed from 150% to 200% of salary
for the CEO and 100% to 150% of salary
for the CFO. We retained RoRE as a
performance condition and aligned the
Company definition of RoRE with the
Ofwat definition. We recalibrated the
previous stretch target as the new target
and introduced a new relative stretch
target of UQ performance against the
WaSC peer group, as well as introducing
a two year post-vesting holding period.

c) Deferred shares under the annual
bonus scheme (including awards
granted during the year)
Each year, 50% of an Executive
Director’s annual bonus is deferred in
shares for three years. The awards are
granted in the form of deferred shares.
The deferred shares relating to the
annual bonus for 2018/19 will be granted
in June 2019.

d) Save As You Earn (‘SAYE’)
The Executive Directors, in common
with all eligible UK employees, are
entitled to participate in the Company’s
SAYE Scheme.

Severn Trent Plc Annual Report and Accounts 2019

121

Governance

Directors’ remuneration report continued
Remuneration

Directors’ shareholdings and
summary of outstanding share
interests (audited)

Page 103 in the At a Glance section
summarises the shareholding
requirements under which Executive
Directors are expected to build and
maintain a shareholding in the Company,
and whether Executive Directors have
met the shareholding requirements.

The shareholding requirements for the
CEO and CFO increased in 2018/19.

The Committee believes that it is an
essential part of the Policy that Executive
Directors become material shareholders.
The retention and build-up of equity
is important in a long-term business
such as Severn Trent as it encourages
decisions to be made on a long-term
sustainable basis for the benefit of
customers and shareholders.

There has been no change in the
Directors’ interests in the ordinary share
capital of the Company between those
set out below and 20 May 2019.

External directorships
Liv Garfield was appointed a member of
the Takeover Panel in November 2017.
In respect of her appointment for the
year ended 31 March 2019, she was paid
fees of £12,000 which she retained.

Service contracts for
Executive Directors
Copies of the service contracts of the
Executive Directors and the Letters
of Appointment of the Non-Executive
Directors are available for inspection at
the Company’s registered office during
normal business hours.

Director

Kevin Beeston
Dominique Reiniche
John Coghlan
Andrew Duff
Philip Remnant
Dame Angela Strank
Liv Garfield
James Bowling

Interests in shares as at 31 March 2019

Outstanding scheme interests

Beneficially
owned

LTIP
shares(i)

Annual Bonus
shares(ii)

SAYE
options

2,244
400
2,670
8,184
1,969
459
137,349
32,075

–
–
–
–
–
–
161,378
68,498

–
–
–
–
–
–
42,504
25,399

–
–
–
–
–
–
1,089
2,265

Total

2,244
400
2,670
8,184
1,969
459
342,320
128,237

% Shareholding
guideline
achieved(iii)

–
–
–
–
–
–
147%
103%

(i) LTIP share awards subject to ongoing performance conditions.

(ii) ABS awards are deferred shares which are not subject to further performance conditions.

(iii) The share price used to calculate the percentage of the shareholding guideline achieved was £19.76 (as at 31 March 2019). The guideline figures include

unvested ABS shares (50% deducted to cover statutory deduction).

Service contracts for Executive Directors

Name

Date of service contract

Nature of contract

Notice period

Termination payments

Liv Garfield
James Bowling

10.04.14
01.04.15

Rolling

12 months

Payments for loss of office comprise a maximum
of 12 months’ salary and benefits only

Philip Remnant
Chairman of the
Remuneration Committee
20 May 2019

122

Severn Trent Plc Annual Report and Accounts 2019

Governance

Directors’ report

Strategic report
Governance
Group financial statements
Company financial statements
Other information

The Directors present their report and
the audited Group financial statements,
for the year ended 31 March 2019.
The performance review of the Company
can be found within the Strategic report.
This provides detailed information
relating to the Group, its business
model and strategy, the operation of its
businesses, future developments and the
results and financial position for the year
ended 31 March 2019. The Governance
report set out on pages 64 to 128 is
incorporated by reference into this report
and, accordingly, should be read as part
of this report.

Details of the Group’s policy on
addressing the principal risks and
uncertainties facing the Group are set
out in the Strategic report on pages 54
to 61.

Principal activity
The principal activity of the Group is
to treat and provide water and remove
waste water in the UK and Ireland.

Details of the principal joint ventures,
associated and subsidiary undertakings
of the Group as at 31 March 2019 are
shown in note 19 and 46 to the Group
financial statements.

Areas of operation
During the course of 2018/19, the Group
had activities and operations in the UK
and Ireland.

Directors and their interests
Biographies of the Directors currently
serving on the Board are set out on
pages 66 and 67.

All of the Directors will be offering
themselves for re-election at the Annual
General Meeting (‘AGM’), as set out
in the Governance report on page 84.
The Chairman, Andrew Duff, will be
standing for re-election at the Company’s
forthcoming AGM on 17 July 2019 and, in
order to facilitate an effective succession
plan, it is intended that he remains as
Chairman until the announcement and
induction of his successor.

Details of Directors’ service
contracts are set out in the Directors’
Remuneration report on page 122.
The interests of the Directors in the
shares of the Company are shown on
page 120 of that report. The Board has a
documented process in place in respect
of conflicts.

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.
As permitted by the Company’s Articles
of Association (the ‘Articles’), and to the
extent permitted by law, the Company
indemnifies 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.
The indemnity was in force throughout
the tenure of each Director during the
last financial year, and is currently
in force.

Severn Trent Plc does not have in place
any indemnities for the benefit of the
External Auditor.

Employees
The average number of employees within
the Group is shown in note 9 to the Group
financial statements.

Severn Trent Plc believes a diverse
and inclusive workforce is a key
factor in being a successful business.
Through our Diversity and Equal
Opportunities Policy, the Company seeks
to ensure that every employee, without
exception, is treated equally and fairly
and that all employees are aware of their
responsibilities. This means more than
ensuring we don’t discriminate in any
way – we want to create and maintain
a culture open to a diverse population.
Severn Trent believes that no one should
be hurt or made unwell by what we
do. We did not experience any major
safety incidents and no fatalities during
the year.

We are an equal opportunities employer
and welcome applications from all
individuals, including those with a
disability. We are fully committed
to supporting applications made by
disabled persons, and make reasonable
adjustments to their environment
where possible (having regard to their
particular aptitudes and abilities).
We are also responsive to the needs
of our employees. As such, should any
employee become disabled during their
time with us, we will actively re-train
that employee and make reasonable
adjustments to their environment
where possible, in order to keep them
in employment with us.

All our training, promotion and career
development processes are in place for
all our employees to access, regardless
of their gender, race, age or disability.
The provision of occupational health
programmes is of crucial importance to
Severn Trent with the aim of keeping our
employees fit, healthy and well, including
an employee assistance programme.

Additional information on our diversity
aims and progress can be found on
pages 44 and 82.

Employee engagement
We continuously engage with our
employees in a number of ways to
accommodate different working
patterns. This includes:

• all people briefings, ‘Team Talk’;

• corporate communications events and
roadshows held by functions across
the Company;

• a dedicated intranet, ‘Streamline’;

• online news portal and weekly

roundup, ‘Pipeline News’;

• an active employee social media

presence, ‘Yammer’;

• conference calls and email;

• leadership engagement channels
– Executive Director blogs, senior
management monthly visibility
programme and quarterly events;

• Employee Forum; and

• regular meetings with Trade Unions.

Details of the financial and economic
factors affecting the performance of the
Company are shared with all employees
at the appropriate time using the
methods listed above.

We provide opportunities for employees
to give their feedback to the Company
in a number of ways, from team or
shift meetings, our Employee Forum
and QUEST. More information on
employee engagement can be found in
the stakeholder engagement section on
pages 73 to 74.

Severn Trent Plc Annual Report and Accounts 2019

123

Governance

Directors’ report continued
Other disclosures

The Company is keen to encourage
greater employee involvement in the
Group’s performance through share
ownership. To help align employees’
interests with the success of the
Company’s performance, we operate
an HMRC approved all-employee plan,
the Severn Trent Sharesave Scheme
(‘Sharesave’), which is offered to UK
employees on an annual basis.

69.7% of Severn Trent’s UK employees
now participate in the Sharesave
scheme, with the average participant
contributing £276 each month.

During the year, the Company has
remained within its headroom limits for
the issue of new shares for share plans
as set out in the rules of the above plan.

Research and development
Innovative use of existing and emerging
technologies will continue to be crucial
to the successful development of new
products and processes for the Group
and our products must continue to
deliver value for customers.

Expenditure on research and
development is set out in note 7
to the Group financial statements.

Internal controls
Further details of our internal control
framework can be found in the Audit
Committee report on page 89.

Treasury management
Details on our Treasury Policy and
management are set out in the Chief
Financial Officer’s review on page 52.

Post balance sheet events
Details of post balance sheet events
are set out in note 43 to the Group
financial statements.

Dividends
An interim dividend of 37.35 pence per
Ordinary Share was paid on 4 January
2019. The Directors recommend a final
dividend of 56.02 pence per Ordinary
Share to be paid on 19 July 2019
to shareholders on the register on
14 June 2019. This would bring the total
dividend for 2018/19 to 93.37 pence per
Ordinary Share (2017/18: 86.55 pence).
The payment of the final dividend is
subject to shareholder approval at
the AGM.

Dividend Policy
In 2017/18, we enhanced our Dividend
Policy for the period 2015-2020, with
effect from 2017/18, and will now
increase the dividend by growth of at
least RPI +4% each year. This replaced
the previous Dividend Policy of annual
growth of the dividend at no less than RPI
until March 2020.

The Dividend Policy reflects our strong
operational delivery and financial
performance, while ensuring that our
bills are affordable for all our customers.
When determining the policy the Board
considered various scenarios and
sensitivities, and reviewed the impact of
adverse changes in inflation and interest
rates on key metrics. The Board believes
that the Dividend Policy is commensurate
with a sustainable investment grade
credit rating.

Capital structure
Details of the Company’s issued share
capital and of the movements during the
year are shown in note 10 to the Company
financial statements. 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 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 37 to the Group financial
statements. For shares held by the
Severn Trent Employee Share Ownership
Trust, the Trustee abstains from voting.

No person has any special rights of
control over the Company’s share capital
and all issued shares are fully paid.

With regard to the appointment and
replacement of Directors, the Company
is governed by its Articles, the 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 Severn Trent Plc
Matters Reserved to the Board document
which can be found on our website, the
Articles and the Governance report on
page 71.

Under the Articles, the Directors have
authority to allot Ordinary Shares,
subject to the aggregate nominal amount
limit set at the 2018 AGM.

Change of control
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 are 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 because of a
takeover bid.

Substantial shareholdings
As at 31 March 2019, the Company
had been notified in accordance with
Chapter 5 of the Disclosure Guidance
and Transparency Rules of the following
major shareholdings:

No of
Ordinary
Shares
column

Voting
rights
held
(%)
23,307,808 9.82%

18,722,846

7.73%
9,729,101 2.73%

9,285,649 3.86%

8,336,011
3.51%
8,083,911 2.55%

7,781,012 3.06%

Name of
holder
Lazard Asset
Management
BlackRock
RReef Real
Estate
Legal & General
Investment
Management
Vanguard Group
Maple-Brown
Abbott
Pictet Asset
Management

124

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

As at 20 May 2019, the Company had been
notified of the following holdings of voting
rights in the Ordinary Share capital of
the Company: Lazard Asset Management
23,425,859 shares (9.88%); BlackRock,
Inc shares 17,747,520 (7.48%); Legal
& General Investment Management
9,072,090 shares (3.83%); Vanguard
Group 8,367,928 shares (3.53%); Qatar
Investment Authority shares 7,964,730
(3.35%); Pictet Asset Management
shares 7,306,925 (3.08%); RReef Real
Estate 6,594,363 shares (2.78%);
Maple-Brown Abbott 6,047,772 shares
(2.55)%; SSGA 5,551,542 shares (2.34%).

The percentage of voting rights detailed
above was calculated at the time of
the relevant disclosures were made in
accordance with Rule 5 of the Disclosure
Guidance and Transparency Rules.

Authority to purchase shares
The Company was given authority at its
AGM in 2018 to make market purchases
of Ordinary Shares up to a maximum
number of 23,677,393 Ordinary Shares.
During the year, no Ordinary Shares have
been repurchased.

Authority will again be sought from
shareholders at this year’s AGM to
purchase up to a maximum of 23,757,109
Ordinary Shares.

The Directors believe that it is desirable
to have the general authority to buy
back the Company’s Ordinary Shares in
order to provide maximum flexibility in
the management of the Group’s capital
resources. However, the authority would
only be used if the Board was satisfied
at the time that to do so would be in the
best interests of shareholders.

Contributions for political
and charitable purposes
Donations to charitable organisations
during the year amounted to £65,936
(2018: £81,947). 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 disclosure of any such payment
must be made in the Annual Report and
Accounts. 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 2018 AGM, shareholders gave
the Company authority 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 £150,000 for the Company and
its subsidiaries. Pursuant to those
authorities, during the year ended
31 March 2019, the Group incurred costs
of £nil (2018: £nil). Those authorities
will expire at the 2019 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 aggregate
of £150,000 p.a. 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.

We reduce our carbon footprint
The UK is playing a leading part in
reducing carbon emissions. We want to
play our part in reducing our impact by
reducing our carbon emissions. As the
majority of our carbon emissions are
driven by our use of energy, managing
carbon also means managing costs.
We therefore aim to reduce carbon
emissions and increase our generation of
renewable energy.

We have recently committed to becoming
Net Carbon Zero by 2030. This is
even more ambitious than a science-
based target and builds on our long
track record of making year-on-year
reductions in emissions. We will set out
our detailed strategy to deliver this goal
as part of our forward plans.

The Carbon Trust Standard recognises
our consistent emissions reductions and
effective carbon management processes
and we scored in the top quartile of
companies. We continue to report to the
Carbon Disclosure Project (‘CDP’) each
year which means our climate change
information is publicly accessible.
CDP request information about climate
change from companies on behalf of
investors and score each company
on the quality and completeness of
their responses.

This year, we again increased renewable
energy generation across Severn Trent
(including the total generation of energy
from Agrivert food waste business,
which we purchased in December 2018).
We generated an equivalent of 43% of
Severn Trent Water Limited’s electricity
needs. This was up from 38% in 2017/18.
We continue to lead the UK water
industry, and are on track to generate the
equivalent of 50% of our electricity needs
by the end of 2020.

We plan to continue to reduce our
operational emissions by reducing our
energy use and increase our renewable
energy generation. Pursuing these
measures will continue to reduce our
key sources of emissions, reduce our
reliance on the electricity grid and bring
financial benefits for our customers
and investors.

Severn Trent Plc Annual Report and Accounts 2019

125

Governance

Directors’ report continued
Other disclosures

Report on greenhouse gas emissions
This is the sixth year Severn Trent has
been required to report greenhouse gas
(‘GHG’) emissions in the Directors’ report.

Severn Trent is committed to reducing
its GHG emissions. For Severn Trent
Water, which accounts for 99% of our
total Group emissions, we have been
publicly reporting on our emissions since
2002. In that time we have reduced our
emissions by being more energy efficient
and generating more renewable energy.

Our GHG emissions are reported in
tonnes of carbon dioxide equivalent
(tCO2e), for the period 1 April 2018 to
31 March 2019.

Our total net emissions have fallen again
this year, due to our increased generation
of renewable energy, a reduction in the
emissions-intensity of UK grid electricity
and reduced process emissions as we
move to more advanced digestion of our
sewage sludge. Our net emissions have
also fallen as we have now secured a
proportion of our electricity supply from
accredited renewable energy sources.
We have reported this market-based
benefit separately in the table below.

The GHG data we report is reported
internally during the year to the
Corporate Responsibility Committee
and to the Board. We have subjected
our GHG data and processes to external
assurance by Jacobs.

Our approach to reporting is based on
the GHG Protocol Corporate Accounting
and Reporting Standard and we have
included only emissions from the assets
which we own and operate and which
we can directly influence and reduce,
known as the financial control boundary.
In accordance with the reporting
regulations, we have not reported on
emissions we can influence, but which
we are not responsible for, referred to as
indirect emissions.

For the appointed UK Water businesses
Severn Trent Water and Hafren Dyfrdwy,
we have calculated our emissions using
the ‘Carbon accounting in the UK Water
Industry: methodology for estimating
operational emissions, Version 13’
(released April 2019). This is a peer-
reviewed calculation tool developed and
used by all the major water companies in
the UK. It is updated each year to include
the latest available emissions factors.
For non-appointed business emissions,
we have used the latest Defra emissions
factors which include the relevant
conversion factors for overseas electricity.

Severn Trent carbon footprint kt CO2e

800

700

600

500

400

300

200

100

2002/03

2003/04

2004/05

2005/06

2006/07

2007/08

2008/09

2009/10

2010/11

2011/12

2012/13

2013/14

2014/15

2015/16

2016/17

2017/18

2018/19

GRID BALANCING

We help National Grid balance supply and demand, so that electricity is
available for everybody. We do this by turning assets such as treatment sites
and generators on and off as requested by the Grid. We can now provide flexible
capacity equivalent to the power demand of a town the size of Stafford. This year
we won the Energy and Carbon Initiative of the year at the Water Industry
Achievement awards in recognition of this work.

BUYING GREEN

As part of our efforts to reach carbon neutrality, we are now securing a
proportion of our imported electricity from accredited renewable sources.
We plan to increase the amount of renewable energy we procure in future
to reduce our footprint further.

Severn Trent Plc Direct
Operational Greenhouse
Gas Emissions (tonnes CO2e)

Emissions from combustion of
fuel and operation of facilities
(Scope 1)
Emissions from electricity
purchased for own use (Scope 2)
Total Annual Gross
Operational Emissions
Emissions benefit of the
renewable energy we export
(including biomethane exported for which
we hold green gas certificates)

Emissions reduction from
purchase of renewable energy
(market-based carbon accounting benefit)

Total Annual Net
Operational Emissions

2013/14

2014/15

2015/16

2016/17

2017/18

2018/19

132,535 132,406 134,584 138,131 134,307 132,360

330,679 357,756 337,028 294,426 279,393 217,726

463,214 490,163

471,612 432,557 413,700 350,086

21,672

38,878

45,085

42,069

45,333

46,986

–

34,818

441,542 451,285 426,527 390,488 368,367 268,283

Annual GHG intensity ratio
(t CO2/unit)

Operational GHG emissions of
Severn Trent per £m turnover

2013/14

2014/15

2015/16

2016/17

2017/18

2018/19

248.6

255.2

234.7

214.0

217.4

151.8

126

Severn Trent Plc Annual Report and Accounts 2019

Our gross emissions total in the table
on page 126 applies the ‘location-
based’ accounting methodology for grid
emissions, which is consistent with
previous years. This year, we have also
shown the net benefit of our renewable
energy procurement via our suppliers,
applying the ‘market-based’ accounting
methodology, which is included in our net
emissions total.

Supplier payment policy
Individual operating companies
within the Group are responsible for
establishing appropriate policies with
regard to the payment of their suppliers,
in accordance with the Prompt Payment
Code (‘PPC’). 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.

Relevant audit information
The Directors confirm that:

• so far as each of them is aware,

there is no relevant audit information
of which the Company’s Auditor is
unaware; and

• each of them has taken all the steps
that he/she ought to have taken as
a Director to make himself/herself
aware of any relevant audit information
and to establish that the Company’s
Auditor is aware of that information.

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

Strategic report
Governance
Group financial statements
Company financial statements
Other information

Disclosures required under Listing Rule 9.8.4R
The information required to be disclosed by Listing Rule 9.8.4R can be located
in the following pages of this Annual Report and Accounts:

Section
(1)
(4)
(8)
(2), (5), (6), (7),
(9)–(14)

Information to be included
A statement of the amount of interest capitalised 155
106
Details of long-term incentive schemes
193 to 194
Section 7 in relation to subsidiary undertakings
Not applicable

Location

External Auditor
Having carried out a review of their
effectiveness during the year, details
of which can be found in the Audit
Committee report on page 90, the Audit
Committee has recommended to the
Board the reappointment of Deloitte
LLP. The reappointment and a resolution
to that effect will be on the agenda at
the AGM. Deloitte LLP indicated their
willingness to continue as Auditor.
The Audit Committee will also be
responsible for determining the audit fee
on behalf of the Board.

Accounts of Severn Trent Water Limited
and Hafren Dyfrdwy Cyfyngedig
Separate Annual Performance
Reports for each of Severn Trent
Water Limited and Hafren Dyfrdwy
Cyfyngedig are prepared and provided
to Ofwat. Copies are available on the
respective websites.

Additionally, separate Annual Reports for
each of Severn Trent Water Limited and
Hafren Dyfrdwy Cyfyngedig are available
on the respective websites.

Annual General Meeting
The AGM of the Company will be held at
the Ricoh Arena, Phoenix Way, Coventry,
CV6 6GE at 11am on Wednesday 17 July
2019. 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 Severn Trent Plc website.

By order of the Board

Bronagh Kennedy
Group General Counsel and
Company Secretary
20 May 2019

Severn Trent Plc Annual Report and Accounts 2019

127

Governance

Directors’ Responsibilities Statement
Other disclosures

The Directors are responsible for
preparing the Annual 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
the 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 elected
to prepare the Company financial
statements in accordance with United
Kingdom Generally Accepted Practice
(United Kingdom Accounting Standards
and applicable law) including FRS 101
‘Reduced Disclosure Framework’.
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 judgments 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 the Group financial
statements, International Accounting
Standard 1 requires that Directors:

Responsibility Statement
Each of the Directors confirm that to the
best of their knowledge:

• 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.

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 UK governing the
preparation and dissemination of
financial statements may differ from
legislation in other jurisdictions.

• 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;

• the Strategic 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; and

• the Annual Report and financial

statements, taken as a whole, are fair,
balanced and understandable and
provide the information necessary for
shareholders to assess the Company’s
position and performance, business
model and strategy.

This Responsibility Statement was
approved by the Board of Directors
on 20 May 2019 and is signed on its
behalf by:

Andrew Duff
Chairman
20 May 2019

James Bowling
Chief Financial Officer

128

Severn Trent Plc Annual Report and Accounts 2019

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

Strategic report
Governance
Group financial statements
Company financial statements
Other information

Report on the audit of the financial statements

Opinion
In our opinion:
• the financial statements of Severn Trent Plc (the ‘parent company’) and its subsidiaries (the ‘Group’) give a true and fair view of the state of the

Group’s and of the parent company’s affairs as at 31 March 2019 and of the Group’s profit for the year then ended;

• the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as

adopted by the European Union;

• the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting

Practice, including Financial Reporting Standard 101 Reduced Disclosure Framework; and

• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group

financial statements, Article 4 of the IAS Regulation.
We have audited the financial statements which comprise:
• the consolidated income statement;
• the consolidated and parent company statement of comprehensive income;
• the consolidated and parent company balance sheets;
• the consolidated and parent company statements of changes in equity;
• the consolidated cash flow statement; and
• the related notes to the consolidated financial statements 1 to 46 and the related notes to the parent company financial statements 1 to 18.
The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as
adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial
statements is applicable law and United Kingdom Accounting Standards, including FRS 101 Reduced Disclosure Framework (United Kingdom
Generally Accepted Accounting Practice).

Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under
those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report.
We are independent of the Group and the parent company in accordance with the ethical requirements that are relevant to our audit of the
financial statements in the UK, including the Financial Reporting Council’s (the FRCs’) Ethical Standard as applied to listed public interest
entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We confirm that the non-audit services
prohibited by the FRC’s Ethical Standard were not provided to the Group or the parent company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Summary of our audit approach

Key audit matters

The key audit matters that we identified in the current year were:
• valuation of the provision for trade receivables in Severn Trent Water Limited;
• valuation of the Group’s retirement benefit obligation; and
• classification and valuation of capital expenditure in Severn Trent Water Limited.
Within this report, any new key audit matters are identified with
as the prior year identified with

and any key audit matters which are the same

Materiality

Scoping

Significant changes
in our approach

The materiality that we used for the Group financial statements was £18 million which was determined on the
basis of profit before tax, gains/losses on financial instruments and exceptional items.

Our audit scoping has resulted in over 95% of the Group’s net operating assets and profit before tax being subject
to audit testing.

In the year ended 31 March 2018, we reported the “accuracy of wholesale revenue for non-household customers
in the new water market” as a key audit matter. As the year ended 31 March 2019 represents the second year
of the operation of this market, and processes and controls are embedded within the business, we no longer
consider this to be a reportable key audit matter.

Conclusions relating to going concern, principal risks and viability statement

Going concern
We have reviewed the Directors’ statement in note 2 a) to the financial statements about whether they considered it appropriate to adopt the going
concern basis of accounting in preparing them and their identification of any material uncertainties to the Group’s and the Company’s ability to
continue to do so over a period of at least 12 months from the date of approval of the financial statements.
We considered as part of our risk assessment the nature of the Group, its business model and related risks including where relevant the impact
of Brexit, the requirements of the applicable financial reporting framework and the system of internal control. We evaluated the Directors’
assessment of the Group’s ability to continue as a going concern, including challenging the underlying data and key assumptions used to make
the assessment, and evaluated the Directors’ plans for future actions in relation to their going concern assessment.
We are required to state whether we have anything material to add or draw attention to in relation to that statement required by Listing Rule
9.8.6R(3) and report if the statement is materially inconsistent with our knowledge obtained in the audit.
We confirm that we have nothing material to report, add or draw attention to in respect of these matters.

Severn Trent Plc Annual Report and Accounts 2019

129

Group financial statements

Independent Auditor’s report to the members
of Severn Trent Plc continued

Principal risks and viability statement
Based solely on reading the Directors’ statements and considering whether they were consistent with the knowledge we obtained in the course of
the audit, including the knowledge obtained in the evaluation of the Directors’ assessment of the Group’s and the Company’s ability to continue as
a going concern, we are required to state whether we have anything material to add or draw attention to in relation to:
• the disclosures on pages 56 to 61 that describe the principal risks and explain how they are being managed or mitigated;
• the Directors’ confirmation on page 56 that they have carried out a robust assessment of the principal risks facing the Group, including those

that would threaten its business model, future performance, solvency or liquidity; or

• the Directors’ explanation on pages 62 and 63 as to how they have assessed the prospects of the Group, over what period they have done so

and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will
be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures
drawing attention to any necessary qualifications or assumptions.

We are also required to report whether the Directors’ statement relating to the prospects of the Group required by Listing Rule 9.8.6R(3) is
materially inconsistent with our knowledge obtained in the audit.
We confirm that we have nothing material to report, add or draw attention to in respect of these matters.

Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the
current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These
matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the
efforts of the engagement team.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do
not provide a separate opinion on these matters.

Valuation of the provision for trade receivables in Severn Trent Water Limited

Key audit matter
description

A portion of household customers do not or cannot pay their bills which results in the need for provisions to be made
for non-payment of the customer balance. Management makes estimates regarding the expected future loss rate when
calculating the bad debt provision.
The provision for trade receivables as at 31 March 2019 was £115.2 million (31 March 2018: £124.5 million).
Changes have been made to the basis of estimation of the bad debt provision for the year ended 31 March 2019 as a
result of the adoption of IFRS 9 Financial Instruments. Provisions are made against Severn Trent Water Limited’s
trade receivables based on historical cash collection rates of debt now aged over seven years, which is considered by
management to be representative of collection risk on the whole population of household debtors. The key audit matter,
which is also a potential fraud risk, has been focused on the valuation of the household bad debt provision, specifically
cash collection reflected in the model for debt aged greater than seven years.
The Audit Committee also considered this as a significant issue as discussed in the Audit Committee report on page 88.
The provision for trade receivables is discussed in note 2 p) and 21 to the Group financial statements.

How the scope of our
audit responded to
the key audit matter

We have audited and critically reviewed the assumptions used in the calculation of the bad debt provision as follows:
• assessed the design and implementation of key management review controls over the bad debt provision model;
• assessed the allocation of cash collected on years seven to ten debt to ensure that it has not inappropriately been

allocated to this ageing bucket to reduce the overall provisioning rate;

• reviewed management’s assumptions applied to the provision for trade receivables and challenged whether they
reflect the lifetime expected credit loss applied to trade receivables, including a review of cash collection trends,
demographic and economic trends; and

• reconciled the debtor ageing for each debt category to source data.

Key observations

We are satisfied that the assumptions applied in assessing the overall bad debt provision are reasonable and we
consider changes to the basis of estimation of the bad debt provision to be appropriate.

Valuation of the Group’s retirement benefit obligation

Key audit matter
description

Valuation of retirement benefit obligations is an area involving significant estimation because the process is complex
and requires management (after taking advice from their actuarial advisers) to make a number of assumptions
concerning the discount rate, inflation rate, pension increases, and the longevity of current pensioners in order to
determine the value of the schemes’ liabilities. The key audit matter is focused on the valuation of the pension scheme
liabilities and the appropriateness of the actuarial assumptions that are used to calculate it, specifically with reference
to the discount rate.
The Group’s retirement benefit obligation as at 31 March 2019 is £452.9 million (31 March 2018: £519.8 million) as per
note 28 Retirement benefit schemes.
The Audit Committee also considered this as a significant issue as discussed in the Audit Committee report on page 89.
Management has included this as a key source of estimation uncertainty in note 4 to the Group financial statements.

How the scope of our
audit responded to
the key audit matter

We have challenged the assumptions applied by performing the following procedures:
• evaluated the design and implementation of management’s key control;
• with the support of our pension specialists within our audit team, we challenged the assumptions used in the
calculation of the pension scheme deficit as detailed in note 28 specifically challenging the discount rate with
reference to comparable market and other third party data; and

• assessed whether there had been any changes in the methodology to determine the assumptions since the prior year.

Key observations

We are satisfied that management’s assumptions in the valuation of the retirement benefit obligation are appropriate
with consistent valuation methodology to previous periods.

130

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

Classification and valuation of capital expenditure in Severn Trent Water Limited

Key audit matter
description

Severn Trent Water Limited has a substantial capital programme which has been agreed with the regulator (Ofwat)
and therefore incurs significant expenditure in relation to the development and maintenance of both infrastructure and
non-infrastructure assets.
Severn Trent Water Limited property, plant and equipment (“PPE”) external additions in the year were £838.2 million
(2018: £663.2 million) of the total additions of £861.4 million (2018: £691.2 million) disclosed in note 18.
As the classification of capital expenditure, operating expenditure and infrastructure renewals expenditure directly
affects the Group’s reported financial performance, we identified a key audit matter relating to an overstatement
of capital expenditure, whether caused by changing the Group’s capex implementation guidance and/or incorrect
application of this guidance. Due to the level of judgment involved, we have determined that there was a potential for
fraud through possible manipulation of this balance.
The Audit Committee also considered this a significant issue as discussed in the Audit Committee report on page 88.
Management has included this as a key source of estimation uncertainty in note 4 to the financial statements.

How the scope of our
audit responded to
the key audit matter

We performed the following procedures to respond to the key audit matter:
• reviewed Severn Trent Water Limited’s capitalisation policy and implementation guidance to understand any changes

in the current year and to determine compliance with the relevant accounting standards;

• evaluated the design and implementation and operating effectiveness of controls over the application of the policy to

expenditure incurred on projects within the Group’s capital programme during the year;

• tested whether there have been any changes in the application of the policy; and
• for a sample of capital projects, assessed the application of the capitalisation policy to the costs incurred by

reviewing the business cases and invoices and obtained further explanations and evidence for significant changes in
capital expenditure from budget.

Key observations

We are satisfied that the classification and valuation of assets capitalised in the year is appropriate.

Our application of materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a
reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in
evaluating the results of our work.
Based on our professional judgment, we determined materiality for the financial statements as a whole as follows:

Materiality

£18 million (2018: £18 million)

Group financial statements

Basis for determining
materiality

Rationale for the
benchmark applied

Approximately 4.8% (2018: approximately 5.6%) of profit before
tax, exceptional items and fair value movements in derivative
financial instruments. Whilst underlying profit has increased,
the business has not changed significantly and therefore
materiality has been retained at £18 million.

As in 2018, profit before tax, gains/losses on financial
instruments and exceptional items has been used in order
to focus on the Group’s underlying trading performance
consistent with the Group’s internal and external reporting.

Parent company financial statements

£16.2 million (2018: £16.2 million)

3.0% of net assets (2018: 3.0%) capped at 90% of
Group materiality.

The parent company does not trade or exist for
profit generating purposes so materiality has been
determined using net assets.

Proﬁt before tax, exceptional items
and fair value movements in derivatives
£378.3 million

Group materiality £18.0 million

Component materiality range
£16.2 million to £0.03 million

Audit Committee reporting
threshold £0.75 million

We agreed with the Audit Committee that we would
report to the Committee all audit differences in excess
of £750,000 (2018: £750,000), as well as differences
below that threshold that, in our view, warranted
reporting on qualitative grounds. We also report to
the Audit Committee on disclosure matters that we
identified when assessing the overall presentation of
the financial statements.

Proﬁt before tax, exceptional items and fair value movements in derivatives

An overview of the scope of our audit
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the
risks of material misstatement at the Group level.
Regulated Water and Waste Water is primarily comprised of Severn Trent Water Limited and Hafren Dyfrdwy Cyfyngedig which were subject to
a full scope audit using a materiality of £15 million and £0.6 million respectively (2018: £15 million and £0.4 million). We have audited a further
nine components using statutory materialities which range from £34,000 to £9 million (2018: ten components using statutory materialities which
ranged from £44,000 to £9 million). Audit work to respond to the risks of material misstatement was performed directly by the Group audit
engagement team.
This represents over 95% (2018: over 90%) of the Group’s net operating assets and profit before tax, gains/losses on financial instruments and
exceptional items.

Severn Trent Plc Annual Report and Accounts 2019

131

Group financial statements

Independent Auditor’s report to the members
of Severn Trent Plc continued

At the parent entity level we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that there
were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to full scope
audit procedures.

Other information
The Directors are responsible for the other information. The other information comprises the information included in the annual report, other
than the financial statements and our Auditor’s report thereon.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we
do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether
the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be
materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material
misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we
conclude that there is a material misstatement of this other information, we are required to report that fact.
In this context, matters that we are specifically required to report to you as uncorrected material misstatements of the other information include
where we conclude that:
• fair, balanced and understandable – the statement given by the Directors that they consider the annual report and financial statements taken
as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and
performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or

• Audit Committee reporting – the section describing the work of the Audit Committee does not appropriately address matters communicated by

us to the Audit Committee; or

• Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the Directors’ statement required under the

Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code containing provisions specified for review by
the Auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate
Governance Code.

We have nothing to report in respect of these matters.

Responsibilities of Directors
As explained more fully in the Directors’ responsibilities statement, the Directors are responsible for the preparation of the financial statements
and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group’s and the parent company’s ability to continue as a
going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors
either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an Auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but
is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements
can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial statements.
Details of the extent to which the audit was considered capable of detecting irregularities, including fraud are set out below.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our Auditor’s report.

Extent to which the audit was considered capable of detecting irregularities, including fraud
We identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and then design and
perform audit procedures responsive to those risks, including obtaining audit evidence that is sufficient and appropriate to provide a basis for
our opinion.

Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and
regulations, our procedures included the following:
• enquiring of management, internal audit and the Audit Committee, including obtaining and reviewing supporting documentation, concerning

the Group’s policies and procedures relating to:

– identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance;
– detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud;
– the internal controls established to mitigate risks related to fraud or non-compliance with laws and regulations;
• discussing among the engagement team and involving relevant internal specialists, including tax, valuations, pensions, IT, and financial
instruments regarding how and where fraud might occur in the financial statements and any potential indicators of fraud. As part of this
discussion, we identified potential for fraud in the following areas: valuation of the provision for trade receivables in Severn Trent Water
Limited, classification and valuation of capital expenditure in Severn Trent Water Limited, and accuracy of wholesale revenue for wholesale
customers in the non-household retail market; and

• obtaining an understanding of the legal and regulatory framework that the Group operates in, focusing on those laws and regulations that had
a direct effect on the financial statements or that had a fundamental effect on the operations of the Group. The key laws and regulations we
considered in this context included the UK Companies Act, Listing Rules, pensions legislation and tax legislation.

132

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

Audit response to risks identified
As a result of performing the above, we identified valuation of the provision for trade receivables in Severn Trent Water Limited and, classification
and valuation of capital expenditure in Severn Trent Water Limited as key audit matters. The key audit matters section of our report explains the
matters in more detail and also describes the specific procedures we performed in response to those key audit matters.
Accuracy of wholesale revenue for wholesale customers in the non-household retail market has remained a significant risk due to fraud whilst
no longer being a key audit matter. In response to the risk identified, we have:
• evaluated the design and implementation of key management controls around the accuracy of the wholesale revenue for wholesale customers

in the non-household market;

• performed an analytical review of total wholesale revenue by calculating an expectation based on prior year revenue, adjusted for tariff changes;
• completed substantive testing of the consumption uplift model in order to obtain assurance over the accuracy and completeness of the MOSL

data populated within the model; and

• challenged whether the refinements to the model, including removing the adjustment relating to large and intermediate customers,

are appropriate.

In addition to the above, our procedures to respond to risks identified included the following:
• reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with relevant laws and

regulations discussed above;

• enquiring of management, the Audit Committee and in-house legal counsel concerning actual and potential litigation and claims;
• performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to fraud;
• reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence with

regulatory authorities; and

• in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other adjustments;
assessing whether the judgments made in making accounting estimates are indicative of a potential bias; and evaluating the business rationale
of any significant transactions that are unusual or outside the normal course of business.

We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including internal
specialists, and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit.

Report on other legal and regulatory requirements
Opinions 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 the Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
• the information given in the Strategic report and the Directors’ report for the financial year for which the financial statements are prepared is

consistent with the financial statements; and

• the Strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Group and of the parent company and their environment obtained in the course of the
audit, we have not identified any material misstatements in the Strategic report or the Directors’ report.

Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not received all the information and explanations we require for our audit; or
• 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 are not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.

Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of Directors’ remuneration have not been made
or the part of the Directors’ remuneration report to be audited is not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
Other matters
Auditor tenure
Following the recommendation of the Audit Committee, we were appointed by the Company at its Annual General Meeting on 26 July 2005 to
audit the financial statements for the year ending 31 March 2006 and subsequent financial periods. The period of total uninterrupted engagement
including previous renewals and reappointments of the firm is 14 years, covering the years ending 31 March 2006 to 31 March 2019.

Consistency of the audit report with the additional report to the Audit Committee
Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance with ISAs (UK).

Use of our report
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.

Kari Hale, ACA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
20 May 2019

Severn Trent Plc Annual Report and Accounts 2019

133

Group financial statements

Consolidated income statement
For the year ended 31 March 2019

Turnover
Other income
Operating costs before charge for bad and doubtful debts, amortisation of acquired intangible
assets and exceptional items
Charge for bad and doubtful debts
Operating costs before amortisation of acquired intangible assets and exceptional items
Amortisation of acquired intangible assets
Exceptional items
Total operating costs
Profit before interest, tax, amortisation of acquired intangible assets and exceptional items
Amortisation of acquired intangible assets
Exceptional items
Profit before interest and tax
Finance income
Finance costs
Net finance costs
Net gains/(losses) on financial instruments
Share of net (loss)/profit of joint ventures accounted for using the equity method
Profit on ordinary activities before taxation
Current tax
Deferred tax
Taxation on profit on ordinary activities
Profit for the year from continuing operations
Profit for the year from discontinued operations
Profit for the year

Earnings per share (pence)

From continuing operations
Basic
Diluted
From continuing and discontinued operations
Basic
Diluted

Note
5,6

2019

£m
1,767.4
19.9

2018
(restated
see note 2 a)
£m
1,696.4
3.9

(1,188.1)
(25.6)
(1,213.7)
(0.7)
(9.6)
(1,224.0)
573.6
(0.7)
(9.6)
563.3
68.9
(263.1)
(194.2)
16.0
(0.4)
384.7
(31.8)
(37.6)
(69.4)
315.3
–
315.3

(1,134.7)
(25.8)
(1,160.5)
–
(12.6)
(1,173.1)
539.8
–
(12.6)
527.2
67.7
(287.2)
(219.5)
(6.7)
0.2
301.2
(32.9)
(28.7)
(61.6)
239.6
13.2
252.8

10
11

12
19

13
13
13

Note

15
15

2019

2018
(restated)

133.4
133.2

101.8
101.5

107.4
107.1

134

Severn Trent Plc Annual Report and Accounts 2019

Consolidated statement of comprehensive income
For the year ended 31 March 2019

Profit for the year
Other comprehensive income/(loss)
Items that will not be reclassified to the income statement:

Net actuarial gains
Tax on net actuarial gains

Items that may be reclassified to the income statement:

(Losses)/gains on cash flow hedges
Deferred tax on losses/gains on cash flow hedges
Amounts on cash flow hedges transferred to the income statement
Deferred tax on transfer to the income statement
Exchange movement on translation of overseas results and net assets
Cumulative exchange gains taken to the income statement

Other comprehensive income for the year
Total comprehensive income for the year

Strategic report
Governance
Group financial statements
Company financial statements
Other information

2019

£m
315.3

2018
(restated
see note 2 a)
£m
252.8

57.9
(9.8)
48.1

(8.6)
1.5
8.2
(1.3)
–
–
(0.2)
47.9
363.2

29.1
(7.6)
21.5

5.8
(1.0)
8.2
(1.4)
(1.6)
(29.8)
(19.8)
1.7
254.5

Severn Trent Plc Annual Report and Accounts 2019

135

Group financial statements

Consolidated statement of changes in equity
For the year ended 31 March 2019

As at 1 April 2017 as previously reported
Restatement
As at 1 April 2017 restated
Profit for the year
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 transfer to the income statement
Exchange movement on translation of overseas results and
net assets
Cumulative exchange gains transferred to income statement
Net actuarial gains
Tax on net actuarial gains
Transfer between reserves
Total comprehensive income/(loss) for the year
Share options and LTIPs
– proceeds from shares issued
– value of employees’ services
Current tax on share based payments
Deferred tax on share based payments
Dividends paid
As at 31 March 2018 restated

As at 1 April 2018 as previously reported
Restatement (see note 2 a)
As at 1 April 2018 restated
Profit for the year
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 transfer to the income statement
Net actuarial gains
Tax on net actuarial gains
Total comprehensive income/(loss) for the year
Share options and LTIPs
– proceeds from shares issued
– value of employees' services
– own shares purchased
Current tax on share based payments
Dividends paid
As at 31 March 2019

Equity attributable to owners of the company

Share
capital
£m
234.7
–
234.7
–
–
–
–
–

–
–
–
–
–
–

0.4
–
–
–
–
235.1

235.1
–
235.1
–
–
–
–
–
–
–
–

0.8
–
–
–
–
235.9

Share
premium
£m
112.5
–
112.5
–
–
–
–
–

Other
reserves
£m
121.8
–
121.8
–
5.8
(1.0)
8.2
(1.4)

Retained
earnings
£m
454.3
4.1
458.4
252.8
–
–
–
–

–
–
–
–
–
–

5.2
–
–
–
–
117.7

117.7
–
117.7
–
–
–
–
–
–
–
–

10.3
–
–
–
–
128.0

(1.6)
(29.8)
–
–
(9.0)
(28.8)

–
–
–
–
–
93.0

93.0
–
93.0
–
(8.6)
1.5
8.2
(1.3)
–
–
(0.2)

–
–
–
–
–
92.8

–
–
29.1
(7.6)
9.0
283.3

–
6.9
0.8
(1.3)
(197.0)
551.1

547.9
3.2
551.1
315.3
–
–
–
–
57.9
(12.2)
361.0

–
8.1
(1.1)
0.2
(211.9)
707.4

Total
£m
923.3
4.1
927.4
252.8
5.8
(1.0)
8.2
(1.4)

(1.6)
(29.8)
29.1
(7.6)
–
254.5

5.6
6.9
0.8
(1.3)
(197.0)
996.9

993.7
3.2
996.9
315.3
(8.6)
1.5
8.2
(1.3)
57.9
(12.2)
360.8

11.1
8.1
(1.1)
0.2
(211.9)
1,164.1

136

Severn Trent Plc Annual Report and Accounts 2019

Consolidated balance sheet
At 31 March 2019

Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Investments in joint ventures
Derivative financial instruments
Trade and other receivables
Retirement benefit surplus

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

Current liabilities
Borrowings
Trade and other payables
Current tax payable
Provisions for liabilities

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

Net assets
Equity
Called up share capital
Share premium account
Other reserves
Retained earnings
Total equity

Signed on behalf of the Board who approved the accounts on 20 May 2019.

Andrew Duff
Chairman

James Bowling
Chief Financial Officer

Company Number 02366619

Strategic report
Governance
Group financial statements
Company financial statements
Other information

2019

Note

£m

2018
(restated
see note 2 a)
£m

16
17
18
19
20
21
28

21
20
22

23
26

23
25
26
27
28
29

30
31
32

90.9
124.2
9,085.6
37.0
68.4
204.0
18.6
9,628.7

20.8
513.5
0.1
41.0
575.4

(197.0)
(496.7)
(9.3)
(32.2)
(735.2)
(159.8)

(5,857.2)
(126.5)
(1,082.9)
(747.5)
(471.5)
(19.2)
(8,304.8)
1,164.1

235.9
128.0
92.8
707.4
1,164.1

62.2
88.4
8,471.9
37.6
36.0
185.3
18.2
8,899.6

18.5
456.4
0.2
51.1
526.2

(308.7)
(462.6)
(8.6)
(40.6)
(820.5)
(294.3)

(5,259.1)
(116.0)
(1,009.4)
(675.2)
(538.0)
(10.7)
(7,608.4)
996.9

235.1
117.7
93.0
551.1
996.9

Severn Trent Plc Annual Report and Accounts 2019

137

Group financial statements

Consolidated cash flow statement
For the year ended 31 March 2019

Cash generated from operations
Tax received
Tax paid
Net cash generated from operating activities
Cash flows from investing activities
Purchase of subsidiaries net of cash acquired
Investments in associates and joint ventures
Purchases of property, plant and equipment
Purchases of intangible assets and goodwill
Contributions and grants received
Proceeds on disposal of subsidiaries net of cash disposed
Proceeds on disposal of property, plant and equipment
Net loans advanced to joint ventures and associates
Interest received
Net cash from investing activities
Cash flow from financing activities
Interest paid
Interest element of finance lease payments
Dividends paid to shareholders of the parent
Repayments of borrowings
Repayments of obligations under finance leases
New loans raised
Issues of shares
Swap termination payment
Purchase of own shares
Net cash flow from financing activities
Net movement in cash and cash equivalents
Net cash and cash equivalents at the beginning of the year
Effect of foreign exchange rates
Net cash and cash equivalents at end of year
Cash and cash equivalents
Bank overdrafts
Short-term deposits

Note
40
40
40

2019
£m
826.3
–
(21.3)
805.0

(50.9)
(6.2)
(782.1)
(35.1)
46.5
–
1.4
–
0.8
(825.6)

(158.0)
(4.4)
(211.9)
(166.5)
(1.7)
554.2
11.1
–
(1.1)
21.7
1.1
38.5
–
39.6
41.0
(1.4)
–
39.6

2018
£m
773.3
8.0
(14.5)
766.8

(0.2)
–
(608.5)
(27.3)
36.8
25.1
8.0
(26.6)
6.4
(586.3)

(183.4)
(5.1)
(197.0)
(552.6)
(1.8)
789.2
5.6
(40.0)
–
(185.1)
(4.6)
44.6
(1.5)
38.5
34.7
(12.6)
16.4
38.5

138

Severn Trent Plc Annual Report and Accounts 2019

Notes to Group financial statements
For the year ended 31 March 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

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 for the Group and the parent company
have been prepared on the going concern basis (see Strategic
report on page 16) under the historical cost convention as
modified by the revaluation of certain financial assets and
liabilities at fair value.

(i) Consolidated financial statements
The consolidated 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 2019.

(ii) Parent company financial statements
The parent company financial statements have been prepared
in accordance with United Kingdom Accounting Standards and
comply with the Companies Act 2006. The Company meets
the definition of a qualifying entity as defined in FRS 100
‘Application of Financial Reporting Requirements’, accordingly
the Company has elected to apply FRS 101 ‘Reduced
Disclosure Framework’.

Therefore, the recognition and measurement requirements
of EU-adopted IFRS have been applied, with amendments
where necessary in order to comply with Companies Act 2006
and The Large and Medium-sized Companies and Groups
(Accounts and Reports) Regulations 2008 (SI 2008/410) as
the parent company financial statements are Companies Act
2006 accounts.

The key accounting policies for the Group and the parent
company are set out below and have been applied consistently
except where indicated. Where policies are specific to the
Group or to the Company this is set out in the relevant policy.

(iii) Changes in accounting policies – IFRS 9 and IFRS 15
In the current financial year the Group has adopted IFRS 9
Financial Instruments and IFRS 15 Revenue from Contracts
with Customers.

The adoption of IFRS 9 has not resulted in any significant
changes to the Group’s existing accounting practices for
financial instruments.

IFRS 9 affects the Group’s measurement and disclosure
of financial instruments with effect from 1 April 2018.
The classification of its financial assets and liabilities has not
changed significantly as a result of the adoption of IFRS 9.
The Group has not retrospectively applied the hedge accounting
criteria of IFRS 9 to hedging relationships established
under IAS 39 accounting. Existing hedges that qualify for
hedge accounting under IAS 39 continue to qualify for hedge
accounting under IFRS 9. For new hedges established following
adoption of IFRS 9 the Group will determine on a case-by-
case basis whether to apply the hedge accounting provisions
of IFRS 9.

Provisions against trade receivables were calculated under
the previous accounting policy using historical collection
information and losses expected as a result of future events
were not recognised. Under IFRS 9 the Group recognises
a provision for the lifetime expected credit losses for trade
receivables. The bad debt charge or provision is not materially
different as a result.

The Group has elected to restate comparative information for
prior periods upon adoption of IFRS 15.

The core principle of IFRS 15 is that an entity should recognise
revenue from the transfer of promised goods or services to
customers in an amount that reflects the consideration the
entity expects to be entitled to in exchange for those goods and
services. The impact of the adoption of IFRS 15 on the Group’s
segments is set out below.

As permitted by FRS 101, the parent company has taken
advantage of the disclosure exemptions available under
that standard in relation to statement of cash flows, share
based payment, financial instruments, capital management,
presentation of comparative information in respect of
certain assets, standards not yet effective and related party
transactions. Where required, equivalent disclosures are given
in the consolidated financial statements.

Regulated Water and Waste Water
There was no change to the recognition of revenue from
charges for water or waste water services. The policy for
recognition of charges for water and waste water services is
set out in note 2 c). The performance obligations are satisfied
by the provision of water and waste water services and this
was also the basis for recognising revenue under the previous
accounting standard.

As permitted by Section 408 of the Companies Act 2006, no
profit or loss account or cash flow statement is presented for
the parent company. The profit for the year is disclosed in the
statement of comprehensive income, the statement of changes
in equity and the balance sheet.

Severn Trent Plc is a partner in Severn Trent Limited
Partnership and Severn Trent 2017 Limited Partnership
(‘the partnerships’), which are registered in Scotland. As the
partnerships are included in the consolidated accounts,
the parent 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.

There was no change to the recognition of contributions from
developers. The policy for recognition of contributions from
developers is set out in note 2 k). The performance obligations
for this income are satisfied through the ongoing supply of
water and waste water services to the relevant property and
this was also the basis for recognising revenue under the
previous accounting standard.

Severn Trent Plc Annual Report and Accounts 2019

139

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

2. Accounting policies continued

a) Basis of preparation continued

(iii) Changes in accounting policies – IFRS 9 and IFRS 15

continued

Business Services
The Operating Services business operates under a series of
bespoke contracts with specific performance obligations.
The Group applied the methodology set out in IFRS 15 to each of
these contracts in order to identify differences from the previous
accounting policy. The most significant differences arose in
relation to the Group’s contract to provide water and waste water
services to the Ministry of Defence (MOD). The Group acts as the
service provider under the MOD Project Aquatrine Package C – a
25 year contract spanning 1,295 sites across England covering
the eastern sea border and from Lancashire in the North West to
West Sussex on the South coast.

Under this contract the Group maintains and upgrades the MOD
infrastructure assets and provides operating services for water
and waste water. Both the operating services and maintenance
and upgrade services are charged under a volumetric tariff,
along with standing charges, which are adjusted with inflation
as agreed in the contract.

Consolidated income statement (extract)
Year ended 31 March 2018

Under IFRS 15, the expected revenue over the life of the
contract is allocated to the performance obligations based on
an expected margin for each performance obligation over the
life of the contract under the following headings:

• operating and maintaining the MOD infrastructure assets;

• upgrading the MOD infrastructure assets;

• administrating the services received from statutory water

and sewerage undertakers; and

• administrating billing services of the MOD’s commercial and

Non Base Dependent customers.

Revenue is recognised in line with the delivery of each
performance obligation. The expected whole-life revenues and
costs on the contract are updated regularly. Any changes to
revenue relating to performance obligations already delivered
are recognised in the period in which they are identified.

The previous accounting policy for this contract was to recognise
revenue billed under the volumetric tariff at the point of billing.
The expected costs for the upgrade services were recognised on
a straight line basis, before adjusting for expected inflation, over
the life of the contract. The resulting asset was recognised as a
financial asset in accordance with IFRIC 12.

The tables below show the effect of the IFRS 15 adoption on the
income statement, balance sheet and earnings per share for
the year ended 31 March 2018.

Turnover
Operating costs
Profit before interest and tax
Net finance costs, losses on financial instruments and results of joint ventures
Profit on ordinary activities before taxation
Taxation on profit on ordinary activities
Profit for the period from continuing operations

Earnings per share
Year ended 31 March 2018

Underlying earnings per share (see note 15)
Underlying basic earnings per share
Underlying diluted earnings per share
Earnings per share from continuing operations
Basic earnings per share
Diluted earnings per share
Earnings per share from continuing and discontinued operations
Basic earnings per share
Diluted earnings per share

Consolidated balance sheet (extract)
As at 31 March 2018

Non-current trade and other receivables
Deferred tax
Retained earnings

140

As previously
reported
£m
1,694.1
(1,165.7)
528.4
(226.0)
302.4
(61.9)
240.5

IFRS 15
impact
£m
2.3
(3.5)
(1.2)
–
(1.2)
0.3
(0.9)

Restated
£m
1,696.4
(1,169.2)
527.2
(226.0)
301.2
(61.6)
239.6

As previously
reported
pence

IFRS 15
impact
pence

Restated
pence

121.0
120.6

102.2
101.9

107.8
107.5

(0.5)
(0.5)

(0.4)
(0.4)

120.5
120.1

101.8
101.5

107.4
107.1

As
previously
reported
£m
181.3
(674.4)
547.9

IFRS 15
impact
£m
4.0
(0.8)
3.2

Restated
£m
185.3
(675.2)
551.1

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

2. Accounting policies continued

b) Basis of consolidation
The consolidated financial statements include the results
of Severn Trent Plc and its subsidiaries and joint ventures.
Results are included from the date of acquisition or
incorporation and are excluded from the date of disposal.

Subsidiaries are consolidated where the Group has the power
to control a subsidiary.

Joint venture undertakings are accounted for on an equity
basis where the Group exercised joint control under a
contractual arrangement.

Non-controlling interests in the net assets of subsidiaries are
identified separately from the Group’s equity. Non-controlling
interests consist of the amount of those interests at the date
of the original business combination and the non-controlling
interests’ share of changes in equity since that date.

Transactions between the Company and its subsidiaries have
been eliminated on consolidation and are not included within
the Group financial statements.

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 gains and losses on
exchange arising during the year are dealt with through the
income statement.

c) Revenue recognition
Revenue includes turnover and interest income.

Turnover 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.

Turnover 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 and
it is probable that it will be received.

Water and waste water revenue is recognised when the service
is provided and 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.

Operating services revenue is recognised in line with the
delivery of each performance obligation. Further details
of the performance obligations are detailed in note 2 a(iii).
The expected turnover over the life of a contract is allocated
to each performance obligation based on the expected margin
for each obligation. Any changes to the revenue relating to
performance obligations already delivered are recognised in
the period in which they are identified. Differences between
amounts recognised as revenue and amounts billed are
recognised as contract assets or liabilities.

Renewable energy revenue includes sales of electricity and gas
and the related green energy incentives. Revenue from energy
sales is recognised when the electricity or gas is delivered to
the national grid. Green energy incentives are recognised when
the Group becomes entitled to them.

Interest income is accrued on a time basis by reference
to the principal outstanding and at the effective interest
rate applicable.

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
and is calculated using tax rates that have been enacted or
substantively enacted by the balance sheet date.

Deferred taxation is provided in full on taxable temporary
differences between the tax bases of assets and liabilities
and their carrying amounts in the financial statements.
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.

Current and deferred tax are recognised in profit or loss,
except where they relate to items that are recognised in other
comprehensive income or directly in equity, in which case,
the current and deferred tax are also recognised in other
comprehensive income or directly in equity, respectively.
Where current tax or deferred tax arises from the initial
accounting for a business combination, the tax effect is
included in the accounting for the business combination.

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 tax assets and liabilities are offset when there is a
legally enforceable right to set off current tax assets against
current tax liabilities.

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 or joint ventures is included in interests in
associates or joint ventures respectively. 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. Following the disposal of the US Operating
Services business on 30 June 2017, all acquisitions prior to
1 April 1998 that were included in goodwill have now been sold.
Purchased goodwill arising on acquisitions of subsidiaries after
31 March 1998 is treated as an intangible fixed asset.

Severn Trent Plc Annual Report and Accounts 2019

141

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

2. Accounting policies continued

f) Goodwill continued

Goodwill and indefinite life intangibles are tested for
impairment in accordance with the policy set out in note 2 l)
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) Other intangible non-current assets
Intangible assets acquired separately are capitalised at cost.
Following initial recognition, finite life intangible assets are
amortised on a straight-line basis over their estimated useful
economic lives as follows:

Software
Other intangible assets

Years
3 – 10
15

Amortisation charged on intangible assets is taken to the
income statement through operating costs.

Finite life intangible assets are reviewed for impairment where
indicators of impairment exist (see 2 l) below).

Intangible assets with indefinite useful lives are carried
at cost less accumulated impairment losses. Such assets
are reviewed for impairment at least annually and where
indications of impairment exist.

Development expenditure is capitalised as an intangible asset
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 costs can be measured reliably.

Research expenditure is expensed when it is incurred.

h) Pre-contract costs
Incremental costs incurred in obtaining contracts with
customers are recognised as a prepayment and written off to
the income statement over the life of the contract where it is
expected that the costs will be recovered.

All other costs of obtaining contracts are written off to the
income statement as incurred.

i) 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 and impairment. Expenditure on
property, plant and equipment relating to research and
development projects is capitalised and depreciated over the
expected useful life of those assets.

The costs of like-for-like replacement of infrastructure
components are recognised in the income statement as
they arise. Expenditure which results in enhancements
to the operating capability of the infrastructure networks
is 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.

Where assets take a substantial period of time to get ready for
their intended use, the borrowing costs directly attributable to
the acquisition, construction or production of these assets are
added to their cost.

Property, plant and equipment is depreciated, using the
straight-line method, 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

j) Leased assets
Leases where the Group obtains assets that transfer
substantially all the risks and rewards of ownership to
the Group are treated as 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 reduces
the obligation to the lessor and the finance charge is 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.

142

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

2. Accounting policies continued

k) 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 operating costs 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 period that they
become receivable.

l) 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.

m) Parent company investments
The parent company recognises investments in subsidiary
undertakings at historical cost.

n) Inventory
Inventory is stated at the lower of cost and net realisable value.
For properties held for resale, the cost includes the cost of
acquiring and developing the sites.

Net realisable value is the estimated selling price less all
estimated costs of completion and costs to be incurred in
selling and distribution.

o) Loans receivable
Loans receivable are measured at fair value on initial
recognition, less issue fee income received. After initial
recognition, loans receivable are subsequently measured
at amortised cost using the effective interest rate method
whereby interest and issue fee income are credited to
the income statement and added to the carrying value of
loans receivable at a constant rate in proportion to the loan
amount outstanding.

p) Trade receivables and accrued income
Trade receivables and accrued income are measured at fair
value on initial recognition. If there is objective evidence that
the asset is impaired, it is written down to its recoverable
amount and the irrecoverable amount is recognised as an
expense in operating costs.

The Group applies the simplified approach permitted by
IFRS 9 for estimating expected credit losses on trade
receivables. For trade receivables that are assessed not to
be impaired individually, expected credit losses are estimated
based on the Group’s historical experience of trade receivable
write-offs.

q) Retirement benefits

(i) Defined benefit 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.
For scheme assets with no quoted price, the fair value is
derived by using quotations from independent third parties
or by using applicable valuation techniques at the end of each
reporting period. 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, representing the cost of employee service in
the year, is included in operating costs. Net finance cost is
calculated by applying the discount rate used for the scheme
liabilities to the net obligation.

Changes in the retirement benefit obligation that arise from:

• differences between the return on scheme assets and

interest income included in the income statement;

• actuarial gains and losses from experience adjustments; and

• changes in demographic or financial assumptions,

are classified as remeasurements, charged or credited to
other comprehensive income and recorded in the statement
of comprehensive income in the period in which they arise.

Severn Trent Plc Annual Report and Accounts 2019

143

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

2. Accounting policies continued

q) Retirement benefits continued
There is no contractual agreement, or stated policy, for
charging the net defined benefit cost to participating Group
companies. Therefore, the parent recognises a charge in the
income statement which is equal to the contributions payable
in the year. The net defined benefit cost for these schemes is
recognised by the sponsoring employers, Severn Trent Water
Limited and Hafren Dyfrdwy Cyfyngedig.

(ii) Defined contribution schemes
Contributions to defined contribution pension schemes are
charged to the income statement in the period in which they
fall due.

r) Provisions
Provisions are recognised where:

• there is a present obligation as a result of a past event;

• it is probable that there will be an outflow of economic

benefits to settle this obligation; and

• a reliable estimate of this amount can be made.

Insurance provisions are recognised for claims notified and for
claims incurred but which have not yet been notified, based on
advice from the Group’s independent insurance advisers.

Provisions are discounted to present value using a pre-tax
discount rate that reflects the risks specific to the liability
where the effect is material.

s) Purchase of own shares
Where market purchases of Severn Trent ordinary shares are
made through an obligating contract, a liability for the present
value of the redemption amount is recognised and charged to
retained earnings. Payments for the purchase of shares are
charged to the liability when made.

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

t) Borrowings
The accounting policy for borrowings that are the hedged item
in a fair value hedge is set out in note 2 u).

All other borrowings are initially recognised at fair value
less issue costs. After initial recognition, borrowings are
subsequently measured at amortised cost using the effective
interest rate method whereby interest and issue costs are
charged to the income statement and added to the carrying
value of borrowings at a constant rate in proportion to the
capital amount outstanding.

Index-linked debt is adjusted for changes in the relevant
inflation index and changes in value are charged to
finance costs.

Borrowings denominated in foreign currency are translated
to sterling at the spot rate on the balance sheet date.
Exchange gains or losses resulting from this are credited or
charged to gains/losses on financial instruments.

u) Derivative financial instruments
Derivative financial instruments are stated at fair value,
including accrued interest. Fair value is determined using the
methodology described in note 34 a). The accounting policy
for changes in fair value depends on whether the derivative is
designated as a hedging instrument. The various accounting
policies are described below.

Interest receivable or payable in respect of derivative financial
instruments is included in finance income or costs.

(i) Derivatives not designated as hedging instruments
Gains or losses arising on remeasurement of derivative
financial instruments that are not designated as hedging
instruments are recognised in gains/losses on financial
instruments in the income statement.

(ii) Derivatives designated as hedging instruments
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.

At the inception of each hedge relationship, the
Group documents:

• the relationship between the hedging instrument and the

hedged item;

• its risk management objectives and strategy for undertaking

the hedge transaction; and

• the results of tests to determine whether the hedging

instrument is expected to be 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.

(iii) 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 corresponding
hedging instrument is also taken to gains/losses on financial
instruments in the income statement so that the effective
portion of the hedge will offset the gain or loss on the
hedged item.

If hedge accounting is discontinued, the fair value adjustment
arising from the hedged risk on the hedged item is amortised
to the income statement over the anticipated remaining life of
the hedged item.

144

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

2. Accounting policies continued

u) Derivative financial instruments continued

(iv) Cash flow hedges
The portion of the gain or loss on the hedging instrument
that is determined to be an effective hedge is recognised in
equity and the ineffective portion is charged to gains/losses on
financial instruments in the income statement. When the gain
or loss from the hedged underlying transaction is recognised
in the income statement, the gains or losses on the hedging
instrument that have previously been recognised in equity are
recycled through gains/losses on financial instruments in the
income statement.

If hedge accounting is discontinued, any cumulative gain
or loss on the hedging instrument previously 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. From this point the derivative is accounted
for in the same way as derivatives not designated as hedging
instruments. If the hedging instrument is terminated, the gains
and losses previously recognised in equity are held in equity
until either the forecast transaction occurs or the forecast
transaction is no longer expected to occur.

(v) Embedded derivatives
Where a contract includes terms that cause some of its
cash flows to vary in a similar way to a derivative financial
instrument, that part of the contract is considered to be an
embedded derivative.

Embedded derivatives are separated from the contract and
measured at fair value with gains and losses taken to the
income statement if:

• the risks and characteristics of the embedded derivative are

not closely related to those of the contract; and

• the contract is not carried at fair value with gains and losses

reported in the income statement.

In all other cases embedded derivatives are accounted for in
line with the accounting policy for the contract as a whole.

v) Share based payment
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.

Share based compensation plans are satisfied in shares of
the parent company. Where the fair value of the awards is
not recharged to participating Group companies, the parent
company records the fair value of the awards as an increase
in its investment in the subsidiary. The investment is adjusted
to reflect shares that do not vest as a result of failing to meet a
non-market based condition.

w) 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.

Net cash and cash equivalents include overdrafts repayable
on demand and amounts drawn under the Group’s revolving
credit facility.

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.

x) Net debt
Net debt comprises borrowings including remeasurements
for changes in fair value of amounts in fair value hedging
relationships, cross currency swaps that are used to fix the
sterling liability of foreign currency borrowings (whether hedge
accounted or not), net cash and cash equivalents, and loans to
joint ventures.

y) 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. Depreciation is not charged on such assets.

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.

z) Business combinations
Acquisitions of subsidiaries and businesses are accounted for
using the acquisition method. The consideration transferred
in a business combination is measured at fair value. The
identifiable assets acquired and the liabilities assumed are
recognised at their fair value at the acquisition date except that:

• deferred tax assets or liabilities and retirement benefit
assets or obligations are recognised and measured in
accordance with the policies set out under notes 2 e) and 2 q)
above; and

• assets or disposal groups that are classified as held for sale
are measured in accordance with the policy set out under
note 2 y) above.

Severn Trent Plc Annual Report and Accounts 2019

145

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

2. Accounting policies continued

b) Impact on lessee accounting

z) Business combinations continued
Where the initial accounting for a business combination is
incomplete at the end of the reporting period, the Group
reports provisional amounts and finalises these within one year
of the acquisition date (the ‘measurement period’).

Goodwill is measured as the excess of the sum of the
consideration transferred, the amount of any non-controlling
interest in the acquiree and the fair value of any interest in
the acquiree previously held by the Group over the net of the
amounts of the assets and liabilities acquired. If the amount of
the assets and liabilities acquired exceeds the amount of the
consideration, this is immediately recognised in the income
statement as a bargain purchase gain.

Contingent consideration is measured at fair value at the
acquisition date.

During the measurement period, changes in provisional fair
values of assets and liabilities acquired, or of contingent
consideration, are recognised as adjustments to goodwill
or bargain purchase gain. Outside the measurement period,
changes in fair value of contingent consideration that is not
classified as equity are recognised in profit or loss.

3. New accounting policies and future requirements

At the balance sheet date, the following Standards and
Interpretations were in issue but not yet effective:

IFRS 16 Leases
IFRS 16 provides a comprehensive model for the identification
of lease arrangements and their treatment in the financial
statements for both lessors and lessees. IFRS 16 will supersede
the current lease guidance including IAS 17 Leases and the
related interpretations when it becomes effective for accounting
periods beginning on or after 1 January 2019. The date of initial
application of IFRS 16 for the Group is 1 April 2019.

In contrast to lessee accounting, IFRS 16 substantially carries
forward the lessor accounting requirements.

a) Impact of the new definition of a lease
The Group will make use of the practical expedient available
on transition to IFRS 16 not to reassess whether a contract
is or contains a lease. Accordingly, the definition of a lease in
accordance with IAS 17 and IFRIC 4 will continue to apply to
those leases entered into or modified before 1 April 2019.

(i) Operating leases
IFRS 16 will change how the Group accounts for leases
previously classified as operating leases under IAS 17 which
were off balance sheet.

On initial application of IFRS 16, for all leases (except as noted
below) the Group will:

• recognise right-of-use assets and lease liabilities in the
consolidated balance sheet, initially measured at the
present value of the future lease payments;

• recognise depreciation of right-of-use assets and interest on
lease liabilities in the consolidated income statement; and

• separate the total amount of cash paid into a principal

portion and an interest portion in the consolidated cash
flow statement.

Lease incentives will be recognised as part of the
measurement of the right-of-use assets and lease liabilities
whereas under IAS 17 they were recognised as a lease liability
incentive, amortised as a reduction of rental expenses on a
straight-line basis.

Under IFRS 16, right-of-use assets will be tested for
impairment in accordance with IAS 36 Impairment of Assets.
This will replace the previous requirement to recognise a
provision for onerous lease contracts.

For short-term leases (lease term of 12 months or less) and
leases of low-value assets, the Group will opt to recognise a
lease expense on a straight-line basis as permitted by IFRS 16.

As at 31 March 2019, the Group has non-cancellable operating
lease commitments of £16.9 million.

A preliminary assessment indicates that £16.7 million of
these arrangements relate to leases other than short-term
leases and leases of low-value assets, and hence the Group
will recognise a right-of-use asset of £23.4 million and a
corresponding lease liability of £23.4 million in respect of
all these leases. The impact on profit or loss is to decrease
operating costs by £2.9 million, to increase depreciation by
£2.7 million and to increase interest expense by £0.7 million.
There are no lease liability incentives or provision for onerous
lease contracts recognised under IAS 17 to be derecognised.

The preliminary assessment indicates that £0.2 million of these
arrangements relate to short-term leases and leases of low-
value assets.

The change in definition of a lease mainly relates to the concept
of control. IFRS 16 distinguishes between leases and service
contracts on the basis of whether the use of an identified asset
is controlled by the customer. Control is considered to exist if
the customer has:

• the right to obtain substantially all of the economic benefits

Under IAS 17, all lease payments on operating leases are
presented as part of cash flows from operating activities.
The impact of the changes under IFRS 16 would be to increase
the cash generated by operating activities by £2.9 million
and to decrease net cash used in financing activities by the
same amount.

from the use of an identified asset; and

• the right to direct the use of that asset.

The Group will apply the definition of a lease and guidance set
out in IFRS 16 to all lease contracts entered into or modified on
or after 1 April 2019. In preparation for the first-time application
of IFRS 16, the Group has carried out an implementation
project. The project has shown that the new definition in
IFRS 16 will not change significantly the scope of contracts
that meet the definition of a lease for the Group.

(ii) Finance leases
The main differences between IFRS 16 and IAS 17 with
respect to assets formerly held under a finance lease is the
measurement of the residual value guarantees provided
by the lessee to the lessor. IFRS 16 requires that the Group
recognises as part of its lease liabilities only the amount
expected to be payable under the residual value guarantee,
rather than the maximum amount guaranteed as required
by IAS 17.

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Governance
Group financial statements
Company financial statements
Other information

New accounting policies and future requirements
continued

b) Impact on lessee accounting continued

(ii) Finance leases continued
Based on an analysis of the Group’s finance leases as at
31 March 2019 on the basis of the facts and circumstances that
exist at that date, the Group has assessed that this change will
not have a material impact on the amounts recognised in the
Group’s consolidated financial statements.

c) Impact on lessor accounting
Under IFRS 16, a lessor continues to classify leases as either
finance leases or operating leases and account for those two
types of leases differently. However, IFRS 16 has increased
the disclosures required, in particular regarding how a
lessor manages the risks arising from its residual interest in
leased assets.

The Group does not believe there to be any impact with regards
to the above.

There are no other standards and interpretations in issue
but not yet adopted that the Directors anticipate will have
a material effect on the reported income or net assets of
the Group.

Critical accounting judgments and key sources
of estimation uncertainty

In the process of applying the Group’s accounting policies,
the Group is required to make certain judgments, estimates
and assumptions that it believes are reasonable based on the
information available. Although these estimates are based on
management’s best knowledge of the amount, event or actions,
actual results may ultimately differ from those estimates.

a) Critical accounting judgments

(i) Classification of costs between operating expenditure

and capital expenditure

Severn Trent Water’s business involves significant construction
and engineering projects. Assessing the classification of
costs incurred on such projects between capital expenditure
and operating expenditure requires judgments to be made.
The judgments are made based on objective criteria that the
Group has developed to facilitate the consistent application
of its accounting policies.

b) Sources of estimation uncertainty

(i) 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 i). The average
useful life of property, plant and equipment is around 46 years.
A five year change in the average useful lives would result in a
£38 million change in the depreciation charge.

(ii) 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 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 and
associated sensitivities are set out in note 28.

5. Segmental analysis

The Group is organised into two main business segments:

Regulated Water and Waste Water includes the wholesale
water and waste water activities of Severn Trent Water
Limited, its retail services to domestic customers, and Hafren
Dyfrdwy Cyfyngedig.

Business Services includes the Group’s Operating Services
businesses in the UK & Ireland, the Green Power business, the
Bioresources business, the Property Development business
and our other businesses including affinity and searches.

In 2017/18 and prior years, the sludge treatment activities of
the Bioresources business were managed by, and included
in, Regulated Water and Waste Water. The renewable
energy generating activities of the Bioresources business
were managed by, and included in, Business Services.
These activities are now managed as a single Bioresources
business within Business Services.

On 30 November 2018 the Group completed the acquisition of
Agrivert Holdings Limited. This business has been included
in the Business Services segment with effect from that date.
Further details of the acquisition are set out in note 38.

Surplus land in the regulated business is, in certain cases, sold
to group companies outside the regulatory ring-fence where its
full development potential can be realised. The profits of this
activity are shared between the regulated and non-regulated
businesses through the initial transfer price and overage
agreements relating to the development potential. In 2017/18
and prior years, the gains from the property development
activity attributable to the regulated business were reported
in Regulated Water and Waste Water and those relating to the
non-regulated business were reported in Corporate and other.
All of these activities are now managed and reported as a
single business within Business Services.

Comparative information for the new segmentation is not
available and the cost to develop it would be excessive. Therefore,
the current period results have been presented on both the old
and new basis of segmentation, in accordance with IFRS 8.

The disposal of the Group’s Operating Services businesses in
Italy and the USA were classified as discontinued operations
in the prior year. These transactions were completed on
23 February and 30 June 2017 respectively.

Severn Trent Plc Annual Report and Accounts 2019

147

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

5. Segmental analysis continued

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 Regulated Water and Waste
Water’s operations are described on pages 34 to 45 of the Strategic Review and those of Business Services on pages 46 to 47.

Results from interests in joint ventures and associates are not included in the segmental reports reviewed by STEC.

The measure of profit or loss that is reported to STEC for the segments is underlying PBIT (see note 45). A segmental analysis of
turnover and underlying PBIT is presented below.

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

a) Segmental results
The tables below show the changes from the old to the new segmentation for turnover and underlying PBIT for the year ended
31 March 2019:

Regulated Water and Waste Water
External turnover
Inter-segment turnover
Total turnover
Profit before interest, tax and exceptional items
Exceptional items
Profit before interest and tax

Business Services
External turnover
Inter-segment turnover
Total turnover
Profit before interest, tax, amortisation of acquired intangible assets
and exceptional items
Exceptional items and amortisation of acquired intangible assets
Profit before interest and tax

Corporate and other
External turnover
Inter-segment turnover
Total turnover
Profit before interest, tax and exceptional items
Exceptional items
Profit before interest and tax

Regulated
Water and
Waste Water
(old basis)
£m
1,637.6
–
1,637.6
544.3
(8.9)
535.4

Business
Services
(old basis)
£m
128.9
17.5
146.4

35.5
(1.0)
34.5

Bioresources1
£m
(54.5)
–
(54.5)
(8.7)
–
(8.7)

Property
Development2
£m
–
–
–
(8.6)
–
(8.6)

Bioresources1
£m
54.5
–
54.5

Property
Development2
£m
–
–
–

8.7
–
8.7

19.9
–
19.9

Regulated
Water and
Waste Water
(new basis)
£m
1,583.1
–
1,583.1
527.0
(8.9)
518.1

Business
Services
(new basis)
£m
183.4
17.5
200.9

64.1
(1.0)
63.1

Corporate and
other
(old basis)
£m
–
0.4
0.4
3.1
(0.4)
2.7

Property
Development2
£m
–
–
–
(11.3)
–
(11.3)

Corporate and
other
(new basis)
£m
–
0.4
0.4
(8.2)
(0.4)
(8.6)

1 In 2017/18 and prior years, the sludge treatment activities of the Bioresources business were managed by, and included in, Regulated Water and Waste Water.

The renewable energy generating activities of the Bioresources business were managed by, and included in, Business Services. These combined activities are now
managed as a single Bioresources business within Business Services.

2 In 2017/18 and prior years, the gains from the property development activity attributable to the regulated business were reported in Regulated Water and Waste
Water and those relating to the non-regulated business were reported in Corporate and other. All of these activities are now managed and reported as a single
business within Business Services.

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Governance
Group financial statements
Company financial statements
Other information

5. Segmental analysis continued

a) Segmental results continued
The following table shows the segmental turnover and PBIT on the old segmentation:

Year ended 31 March
External turnover
Inter-segment turnover
Total turnover
Profit before interest, tax, amortisation of acquired intangible assets
and exceptional items
Exceptional items (see note 8) and amortisation of acquired
intangible assets
Profit before interest and tax

Regulated
Water and
Waste Water
£m
1,637.6
–
1,637.6

544.3

(8.9)
535.4

The reportable segments’ turnover is reconciled to Group turnover as follows:

Year ended 31 March
Regulated Water and Waste Water
Business Services
Corporate and other
Consolidation adjustments

2019

Business
Services
£m
128.9
17.5
146.4

Regulated Water
and Waste Water
£m
1,574.1
0.5
1,574.6

35.5

(1.0)
34.5

2019
(new basis)
£m
1,583.1
200.9
0.4
(17.0)
1,767.4

514.9

(11.1)
503.8

2019
(old basis)
£m
1,637.6
146.4
0.4
(17.0)
1,767.4

2018
(restated)

Business
Services
£m
122.2
18.8
141.0

34.8

(1.8)
33.0

2018
(restated)
£m
1,574.6
141.0
9.0
(28.2)
1,696.4

Included in revenues of Regulated Water and Waste Water of £1,637.6 million (2018: £1,574.6 million) is £335.0 million
(2018: £354.9 million) which arose from sales to Water Plus Select Limited. No other single customer contributed 10% or more to
the Group’s revenue for either 2019 or 2018.

Segmental underlying PBIT is reconciled to the Group’s profit before tax as follows:

Year ended 31 March
Regulated Water and Waste Water
Business Services
Corporate and other
Consolidation adjustments
Profit before interest, tax, amortisation of acquired intangible assets
and exceptional items
Exceptional items and amortisation of acquired intangible assets:

Regulated Water and Waste Water
Business Services
Corporate and other

Net finance costs
Net gains/(losses) on financial instruments
Share of (loss)/profit of joint ventures
Profit before tax

2019
(new basis)
£m
527.0
64.1
(8.2)
(9.3)

2019
(old basis)
£m
544.3
35.5
3.1
(9.3)

2018
(restated)
£m
514.9
34.8
(9.7)
(0.2)

573.6

539.8

(8.9)
(1.0)
(0.4)
(194.2)
16.0
(0.4)
384.7

(11.1)
(1.8)
0.3
(219.5)
(6.7)
0.2
301.2

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.

Severn Trent Plc Annual Report and Accounts 2019

149

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

5. Segmental analysis continued

b) Segmental capital employed
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. The tables below show the changes from the old to the new segmentation for capital
employed as at 31 March 2019:

Regulated Water and Waste Water
Operating assets
Goodwill
Segment assets
Segment operating liabilities
Capital employed

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

Corporate and other
Segment operating assets
Segment operating liabilities
Capital employed

The following table shows segmental capital employed on the old basis:

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

Regulated
Water and
Waste Water
(old basis)
£m
9,501.9
63.5
9,565.4
(1,993.4)
7,572.0

Bioresources
£m
(287.5)
–
(287.5)
7.1
(280.4)

Property
Development
£m
–
–
–
–
–

Business
Services
(old basis)
£m
314.7
28.7
37.0
380.4
(55.2)
325.2

Bioresources
£m
287.5
–
–
287.5
(7.1)
280.4

Property
Development
£m
20.1
–
–
20.1
(6.4)
13.7

Regulated
Water and
Waste Water
(new basis)
£m
9,214.4
63.5
9,277.9
(1,986.3)
7,291.6

Business
Services
(new basis)
£m
622.3
28.7
37.0
688.0
(68.7)
619.3

Corporate and
other
(old basis)
£m
24.1
(68.7)
(44.6)

Property
Development
£m
(20.1)
6.4
(13.7)

Corporate and
other
(new basis)
£m
4.0
(62.3)
(58.3)

Regulated
Water and
Waste Water
£m
9,501.9
63.5
–
9,565.4
(1,993.4)
7,572.0

2019

Business
Services
£m
314.7
28.7
37.0
380.4
(55.2)
325.2

Regulated
Water and
Waste Water
£m
8,900.8
63.5
–
8,964.3
(1,957.6)
7,006.7

2018
(restated)

Business
Services
£m
200.6
–
37.6
238.2
(42.7)
195.5

Operating assets comprise other intangible assets, property, plant and equipment, retirement benefit surpluses, inventory and
trade and other receivables.

Operating liabilities comprise trade and other payables, retirement benefit obligations and provisions.

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Group financial statements
Company financial statements
Other information

5. Segmental analysis continued

b) Segmental capital employed continued
The reportable segments’ assets are reconciled to the Group’s total assets as follows:

2019
(new basis)
£m

2019
(old basis)
£m

2018
(restated)
£m

Segment assets

Regulated Water and Waste Water
Business Services
Corporate and other
Other financial assets
Loan receivable from joint venture
Consolidation adjustments
Total assets

9,277.9
688.0
4.0
109.5
142.0
(17.3)
10,204.1

9,565.4
380.4
24.1
109.5
142.0
(17.3)
10,204.1

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

Regulated Water and Waste Water
Business Services
Corporate and other
Other financial liabilities
Current tax
Deferred tax
Consolidation adjustments
Total liabilities

2019
(new basis)
£m

2019
(old basis)
£m

(1,986.3)
(68.7)
(62.3)
(6,180.7)
(9.3)
(747.3)
14.6
(9,040.0)

(1,993.4)
(55.2)
(68.7)
(6,180.7)
(9.3)
(747.3)
14.6
(9,040.0)

The consolidation adjustments comprise elimination of intra-group creditors.

The following table shows the additions to other intangible assets and property, plant and equipment:

Other intangible assets
Property, plant and equipment

Regulated
Water and
Waste Water
£m
36.1
851.1

2019

Business
Services
£m
2.3
10.3

Regulated
Water and
Waste Water
£m
25.6
680.4

c) Geographical areas
The Group’s sales from continuing operations were derived from the following countries:

UK
Other

2019

£m
1,762.8
4.6
1,767.4

8,964.3
238.2
60.5
87.3
135.6
(60.1)
9,425.8

2018
(restated)
£m

(1,957.6)
(42.7)
(74.6)
(5,683.4)
(8.6)
(674.3)
12.3
(8,428.9)

2018

Business
Services
£m
2.8
10.1

2018
(restated)
£m
1,692.1
4.3
1,696.4

The Group’s non-current assets (excluding financial instruments, deferred tax assets and post-employment benefit assets) were
located in the UK in 2019 and 2018.

Severn Trent Plc Annual Report and Accounts 2019

151

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

6. Revenue

Revenue recognised from contracts with customers is analysed by type of revenue and by business below:

Year ended 31 March 2019

New basis
Water and waste water services
Operating services
Renewable energy
Other sales

Old basis
Water and waste water services
Operating services
Renewable energy
Other sales

Year ended 31 March 2018 (restated)

Water and waste water services
Operating services
Renewable energy
Other sales

Regulated
Water and
Waste Water
£m
1,581.7
–
–
1.4
1,583.1

Operating
Services
£m
–
57.1
–
–
57.1

Green Power
£m
–
–
26.4
–
26.4

Bioresources
£m
54.5
–
29.0
–
83.5

Regulated
Water and
Waste Water
£m
1,636.2
–
–
1.4
1,637.6

Regulated
Water and
Waste Water
£m
1,568.9
–
–
5.2
1,574.1

Other
£m
–
–
–
17.3
17.3

Business
Services
£m
–
57.1
55.4
17.3
129.8

Business
Services
£m
–
63.0
41.6
17.7
122.3

Group
£m
1,636.2
57.1
55.4
18.7
1,767.4

Group
£m
1,568.9
63.0
41.6
22.9
1,696.4

Income from diversions of £8.4 million (2017/18: £9.5 million), which is reimbursement of costs for diversions, is included within
infrastructure maintenance expenditure within operating costs.

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Governance
Group financial statements
Company financial statements
Other information

7. Net 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
Services charges
Depreciation of tangible fixed assets
Amortisation of intangible fixed assets
Hired and contracted services
Operating lease rentals
– land and buildings
– other
Hire of plant and machinery
Research and development expenditure
Loss/(profit) on disposal of tangible
fixed assets
Exchange losses
Infrastructure maintenance expenditure
Ofwat licence fees
Other operating costs
Other operating income

Release from deferred credits
Own work capitalised

Before
amortisation
of acquired
intangible
assets and
exceptional
costs
£m
252.2
25.5
23.6
8.1
309.4
90.3
5.2
60.6
80.8
25.6
35.2
315.4
29.8
242.1

2.3
1.6
6.8
–

0.6
0.1
141.6
5.1
43.2
(3.3)
1,392.4
(14.7)
(164.0)
1,213.7

Amortisation
of acquired
intangible
assets and
exceptional
costs
£m
–
–
9.6
–
9.6
–
–
–
–
–
–
–
0.7
–

–
–
–
–

–
–
–
–
–
–
10.3
–
–
10.3

2019

Total
£m
252.2
25.5
33.2
8.1
319.0
90.3
5.2
60.6
80.8
25.6
35.2
315.4
30.5
242.1

2.3
1.6
6.8
–

0.6
0.1
141.6
5.1
43.2
(3.3)
1,402.7
(14.7)
(164.0)
1,224.0

Before
amortisation
of acquired
intangible
assets and
exceptional
costs
£m
237.2
23.2
20.8
6.9
288.1
79.2
5.9
55.1
82.4
25.8
34.3
308.2
20.5
227.7

0.6
1.1
5.5
2.1

(3.4)
1.1
135.2
3.6
48.0
(3.0)
1,318.0
(14.3)
(143.2)
1,160.5

Amortisation
of acquired
intangible
assets and
exceptional
costs
£m
0.6
–
(8.3)
–
(7.7)
–
–
–
–
–
–
16.8
–
3.5

–
–
–
–

–
–
–
–
–
–
12.6
–
–
12.6

Further details of exceptional costs are given in note 8. Adjusting costs are amortisation of acquired intangible assets.

During the year the following fees were charged by the auditor:

Fees payable to the Company’s auditor for:
– the audit of the Company’s annual accounts
– the audit of the Company’s subsidiary accounts
Total audit fees
Fees payable to the Company’s auditor and its associates for other services to the Group:
– audit related assurance services
– other assurance services
Total non-audit fees

2019
£m

0.2
0.4
0.6

0.1
0.1
0.2

2018
(restated)

Total
£m
237.8
23.2
12.5
6.9
280.4
79.2
5.9
55.1
82.4
25.8
34.3
325.0
20.5
231.2

0.6
1.1
5.5
2.1

(3.4)
1.1
135.2
3.6
48.0
(3.0)
1,330.6
(14.3)
(143.2)
1,173.1

2018
£m

0.2
0.4
0.6

0.1
0.1
0.2

Details of Directors’ remuneration are set out in the Directors’ remuneration report on pages 97 to 122.

Other assurance services also include certain agreed upon procedures performed by Deloitte in connection with Severn Trent
Water’s regulatory reporting requirements to Ofwat.

Severn Trent Plc Annual Report and Accounts 2019

153

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

7. Net operating costs continued

Details of the Group policy on the use of the auditor for non-audit services and how auditor independence and objectivity are
safeguarded are set out in the Audit Committee report on pages 85 to 92. No services were provided pursuant to contingent
fee arrangements.

8. Exceptional items before tax

Regulated Water and Waste Water
Restructuring costs
Gain arising on pension exchange arrangement
GMP equalisation costs

Business Services
Restructuring costs
Gain arising on pension exchange arrangement
GMP equalisation costs

Corporate and other
Gain arising on pension exchange arrangement
GMP equalisation costs

2019

£m

–
–
(8.9)
(8.9)

–
–
(0.3)
(0.3)

–
(0.4)
(0.4)
(9.6)

9. Employee numbers

Average number of employees (including Executive Directors) during the year:

By type of business
Regulated Water and Waste Water
Business Services
Corporate and other

10. Finance income

Interest income earned on bank deposits
Other financial income
Total interest receivable
Interest income on defined benefit scheme assets

2019

Number

5,680
889
11
6,580

Continuing
operations
number

Discontinued
operations
number

5,660
596
9
6,265

–
368
–
368

2019
£m
0.2
7.7
7.9
61.0
68.9

2018
(restated)
£m

(18.8)
7.7
–
(11.1)

(2.1)
0.3
–
(1.8)

0.3
–
0.3
(12.6)

2018

Total
number

5,660
964
9
6,633

2018
£m
0.5
5.2
5.7
62.0
67.7

154

Severn Trent Plc Annual Report and Accounts 2019

11. Finance costs

Interest expense charged on:
Bank loans and overdrafts
Other loans
Finance leases
Total borrowing costs
Other financial expenses
Interest cost on defined benefit scheme liabilities

Strategic report
Governance
Group financial statements
Company financial statements
Other information

2019
£m

21.3
153.0
4.4
178.7
9.6
74.8
263.1

2018
£m

19.2
183.4
4.4
207.0
2.7
77.5
287.2

Borrowing costs of £33.2 million (2018: £26.2 million) incurred funding eligible capital projects have been capitalised at an interest
rate of 3.40% (2018: 3.89%). Tax relief of £5.5 million (2018: £5.0 million) was claimed on these costs which was credited to the
income statement, offset by a related deferred tax charge of £4.9 million (2018: £4.5 million).

12. Gains/(losses) on financial instruments

Gain/(loss) on swaps used as hedging instruments in fair value hedges
Gain arising on debt in fair value hedges
Exchange (loss)/gain on other loans
Loss on cash flow hedges transferred from equity
Hedge ineffectiveness on cash flow hedges
Gain/(loss) arising on swaps where hedge accounting is not applied
Amortisation of fair value adjustment on debt

2019
£m
0.3
0.5
(8.1)
(8.2)
1.9
28.5
1.1
16.0

2018
£m
(1.1)
–
12.7
(8.2)
1.4
(12.6)
1.1
(6.7)

The net gain/(loss) on financial assets and liabilities mandatorily measured at fair value through profit or loss was £28.8 million
(2018: loss of £13.7 million). There were no financial assets or liabilities designated as at fair value through the profit or loss
(2018: nil).

The Group’s hedge accounting arrangements are described in note 36.

13. Taxation

a) Analysis of tax charge/(credit) in the year

Current tax at 19% (2018: 19%)
Current year
Prior years
Total current tax
Deferred tax
Origination and reversal of temporary differences:

Current year
Prior years
Total deferred tax

2019

£m

41.2
(9.4)
31.8

30.1
7.5
37.6
69.4

2018
(restated)
£m

36.8
(3.9)
32.9

21.1
7.6
28.7
61.6

Severn Trent Plc Annual Report and Accounts 2019

155

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

13. Taxation continued

b) Factors affecting the tax charge/(credit) in the year
The tax expense for the year is lower (2018: higher) than the standard rate of corporation tax in the UK of 19% (2018: 19%).
The differences are explained below:

Profit before taxation
Tax at standard rate of corporation tax in the UK 19% (2018: 19%)
Tax effect of depreciation on non-qualifying assets
Other permanent differences
Current year impact of rate change
Adjustments in respect of prior years
Total tax charge

Profit before taxation
Tax at standard rate of corporation tax in the UK 19% (2018: 19%)
Tax effect of depreciation on non-qualifying assets
Other permanent differences
Tax effect of accelerated capital allowances
Other timing differences
Adjustments in respect of prior years
Total current tax charge

2019

£m
384.7
73.1
1.1
0.6
(3.5)
(1.9)
69.4

2019

£m
384.7
73.1
1.1
0.6
(29.5)
(4.1)
(9.4)
31.8

2018
(restated)
£m
301.2
57.2
1.8
1.4
(2.5)
3.7
61.6

2018
(restated)
£m
301.2
57.2
1.8
1.4
(19.7)
(3.9)
(3.9)
32.9

c) Tax charged/(credited) directly to other comprehensive income or equity
In addition to the amount charged/(credited) to the income statement, the following amounts of tax have been charged/(credited)
to other comprehensive income or equity:

Current tax
Tax on share based payments
Tax on pension contributions in excess of income statement charge
Total current tax credited to other comprehensive income or equity
Deferred tax
Tax on actuarial gain
Tax on cash flow hedges
Tax on share based payments
Tax on transfers to the income statement
Total deferred tax charged to other comprehensive income or equity

14. Dividends

Amounts recognised as distributions to owners of the Company in the period:

2019
£m

(0.2)
(9.5)
(9.7)

21.7
(1.5)
–
1.3
21.5

Final dividend for the year ended 31 March 2018 (2017)
Interim dividend for the year ended 31 March 2019 (2018)
Total dividends paid

Pence per share
51.92
37.35
89.27

2019

£m Pence per share
48.90
34.63
83.53

122.9
89.0
211.9

2018
£m

(0.8)
(9.3)
(10.1)

16.9
1.0
1.3
1.4
20.6

2018
£m
115.2
81.8
197.0

Proposed final dividend for the year ended 31 March 2019

56.02

135.0

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

156

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

15. Earnings per share

a) Basic and diluted earnings per share
Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average
number of ordinary shares in issue during the year, excluding treasury shares and 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
dilutive potential ordinary shares.

Basic and diluted earnings per share from continuing and discontinued operations are calculated on the basis of profit from
continuing and discontinued operations attributable to the equity holders of the Company.

The calculation of basic and diluted earnings per share is based on the following data:

(i) Earnings for the purpose of basic and diluted earnings per share from continuing operations

Profit for the year
Adjusted for profit from discontinued operations (see note 39)
Profit for the year from continuing operations

(ii) 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

b) Underlying earnings per share

Underlying basic earnings per share
Underlying diluted earnings per share

2019

£m
315.3
–
315.3

2019
£m
236.3

0.4
236.7

2019

pence
145.8
145.6

2018
(restated)
£m
252.8
(13.2)
239.6

2018
£m
235.3

0.8
236.1

2018
(restated)
pence
120.5
120.1

Underlying earnings per share figures are presented for continuing operations. These exclude the effects of exceptional items
before tax, current tax related to exceptional items, amortisation of acquired intangible assets, net gains/losses on financial
instruments, current tax on net gains/losses on financial instruments and deferred tax. The Directors consider that the adjusted
figures provide a useful additional indicator of performance. The denominators used in the calculations of adjusted basic and
diluted earnings per share are the same as those used in the unadjusted figures set out above.

The adjustments to earnings that are made in calculating underlying earnings per share are as follows:

Earnings for the purpose of basic and diluted earnings per share from
continuing operations
Adjustments for:

– exceptional items before tax
– current tax related to exceptional items
– amortisation of acquired intangible assets
– net (gains)/losses on financial instruments
– current tax on net gains/losses on financial instruments
– deferred tax

Earnings for the purpose of underlying basic and diluted earnings per share

Severn Trent Plc Annual Report and Accounts 2019

2019

£m

2018
(restated)
£m

315.3

239.6

9.6
–
0.7
(16.0)
(2.6)
37.6
344.6

12.6
(0.7)
–
6.7
(3.3)
28.7
283.6

157

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

16. Goodwill

Cost
At 1 April
Acquisition of subsidiary (note 38)
Disposal of subsidiaries
Exchange adjustments
Additional consideration in respect of acquisition
Adjustment to provisional fair values on acquisition
At 31 March

2019
£m

62.2
28.7
–
–
–
–
90.9

2018
£m

81.0
–
(14.4)
(0.6)
0.2
(4.0)
62.2

Goodwill is allocated to the Group’s cash-generating units (CGUs) identified according to operating segment. A summary of the
carrying amount of goodwill by CGU is presented below.

Regulated Water and Waste Water
Agrivert

2019
£m
62.2
28.7
90.9

2018
£m
62.2
–
62.2

Regulated Water and Waste Water also has an intangible asset with an indefinite useful life amounting to £4.3 million
(2018: £4.3 million).

a) Regulated Water and Waste Water
On 1 July 2018 Instruments of Appointment of Severn Trent Water Limited and Hafren Dyfrdwy Cyfyngedig (formerly Dee Valley
Water Limited) were amended to align the areas for which the appointments were made with the national border of England
and Wales. As a result, the business that the goodwill relates to is now partly in Severn Trent Water and partly Hafren Dyfrdwy
consequently this goodwill is now allocated to the Regulated Water and Waste Water cash-generating unit.

The Group has reviewed the carrying value of goodwill for impairment in accordance with the policy stated in note 2. The carrying
value of the Regulated Water and Waste Water CGU was determined on the basis of fair value, through a level 3 valuation, in the
current year. The assessment of the valuation technique was reassessed in the year to align the valuation to reflect the capital
intensive nature of the business and in line with IAS 36 to ensure that the valuation is the higher of value in use or fair value less
costs to sell.

The fair value determined using a discounted cash flow calculation for the Regulated Water and Waste Water segment is based
on the most recent financial projections available for the business, which cover the remainder of the current AMP period to 2020
and the following AMP period, which runs to 31 March 2025. As a regulated water company, the revenues and costs within the
Regulated Water and Waste Water segment are significantly influenced by the regulatory settlement for each AMP period so
management considers it appropriate for the detailed projections to be coterminous with the AMP period.

The key assumptions underlying these projections are:

Discount rate
RPI inflation
CPI inflation
Growth rate in the period beyond the detailed projections

%
6.5
3.0
2.0
1.5

The discount rate was an estimate for the weighted average cost of capital at the year end date based on the nominal pre-tax
WACC detailed in the Ofwat PR19 methodology adjusted to reflect the actual gearing of the Regulated Water and Waste Water
operating segment. The rate disclosed above is the equivalent pre-tax nominal rate.

Inflation has been included in the detailed projections at 3% and 2% for RPI and CPI respectively based on the Bank of England’s
target rate for CPI.

Cash flows beyond the end of the six-year period are extrapolated using an assumed real growth rate of 1.5% in the Group’s
regulatory capital base.

The fair value less costs to sell for the CGU exceeded its carrying value by £4,248 million. An increase in the discount rate to 7.6%
or a reduction in the growth rate in the period beyond the detailed projections to 0.7% would reduce the recoverable amount to the
carrying amount of the goodwill.

158

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

16. Goodwill continued

b) Agrivert
On 30 November 2018, Agrivert Holdings and its subsidiary undertakings were acquired by Severn Trent Group resulting in
provisional goodwill of £28.7 million. This goodwill has been allocated to the Agrivert Group cash-generating unit which is
determined to be the lowest level of independent cash flows relating to the goodwill. Agrivert Group is included within the Green
Power part of the Business Services segment.

The Group has reviewed the carrying value of goodwill for impairment in accordance with the policy stated in note 2. The carrying
value of the Agrivert Group CGU was determined on the basis of a value in use calculation.

The fair value determined using a discounted cash flow calculation for the Agrivert Group CGU is based on the most recent
financial projections available for the business to 2024.

The key assumptions underlying these projections are:

Discount rate
RPI inflation
Growth rate in the period beyond the detailed projections

%
11.3
2.1
2.0

The discount rate was based on the post-tax internal rate of return for the acquisition and benchmarked against market data for
green energy transactions in 2018. This rate was then converted to the equivalent pre-tax rate disclosed above.

Cash flows beyond the end of the five year period are extrapolated using an assumed growth of 2.0% in the Agrivert’s free
cash flows.

The value in use for the CGU exceeded its carrying value by £15 million. An increase in the discount rate to 12.1% or reduction in the
growth rate in the period beyond the detailed projections to 1.2% would reduce the recoverable amount to the carrying amount of
the goodwill.

17. Other intangible assets

Cost
At 1 April 2017
Additions
Disposals
Adjustment to provisional fair values
Disposals of subsidiaries
Exchange adjustments
At 1 April 2018
Additions
Disposals
Acquisition of subsidiaries (note 38)
At 31 March 2019
Amortisation
At 1 April 2017
Amortisation for the year
Disposals
Disposals of subsidiaries
Exchange adjustments
At 1 April 2018
Amortisation for the year
Disposals
At 31 March 2019
Net book value
At 31 March 2019
At 31 March 2018

Computer software

Internally
generated
£m

Purchased
£m

Capitalised
development
costs and
patents
£m

Other
intangible
assets
£m

202.7
9.8
(0.7)
–
–
(0.1)
211.7
23.8
(0.3)
–
235.2

(166.2)
(8.0)
0.6
–
–
(173.6)
(14.5)
0.2
(187.9)

47.3
38.1

113.8
18.2
–
–
(7.2)
(0.1)
124.7
11.3
(1.0)
–
135.0

(70.6)
(12.6)
–
4.3
0.2
(78.7)
(15.3)
0.8
(93.2)

41.8
46.0

13.9
0.4
(1.5)
–
–
–
12.8
–
–
–
12.8

(12.7)
(0.1)
–
–
–
(12.8)
–
–
(12.8)

–
–

–
–
–
4.3
–
–
4.3
–
–
31.5
35.8

–
–
–
–
–
–
(0.7)
–
(0.7)

35.1
4.3

Total
£m

330.4
28.4
(2.2)
4.3
(7.2)
(0.2)
353.5
35.1
(1.3)
31.5
418.8

(249.5)
(20.7)
0.6
4.3
0.2
(265.1)
(30.5)
1.0
(294.6)

124.2
88.4

Other intangible assets includes the Instrument of Appointment acquired with Dee Valley Water and customer contracts and
energy subsidy contracts both acquired with Agrivert.

Severn Trent Plc Annual Report and Accounts 2019

159

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

18. Property, plant and equipment

Cost
At 1 April 2017
Additions
Transfers on commissioning
Disposals
Adjustment to provisional fair values
Disposal of subsidiary undertaking
Reclassifications
Exchange adjustments
At 1 April 2018
Additions
Transfers on commissioning
Disposals
Acquisition of subsidiary undertaking (note 38)
At 31 March 2019
Depreciation
At 1 April 2017
Charge for the year
Disposals
Disposal of subsidiary undertaking
Reclassifications
Exceptional depreciation
Exchange adjustments
At 1 April 2018
Charge for the year
Disposals
At 31 March 2019
Net book value
At 31 March 2019
At 31 March 2018

Land and
buildings
£m

Infrastructure
assets
£m

Fixed plant and
equipment
£m

Moveable plant
£m

Assets under
construction
£m

3,313.0
9.1
69.4
(2.0)
–
–
(3.0)
–
3,386.5
77.9
54.4
(0.9)
63.2
3,581.1

(1,197.0)
(84.5)
1.7
–
4.1
(10.1)
–
(1,285.8)
(85.7)
0.7
(1,370.8)

5,114.2
60.5
52.2
(0.3)
0.8
–
6.5
–
5,233.9
146.8
26.5
(0.1)
–
5,407.1

(1,298.9)
(31.5)
–
–
(1.5)
–
–
(1,331.9)
(36.8)
–
(1,368.7)

4,052.3
16.4
136.5
(12.4)
–
(15.2)
(10.7)
(0.9)
4,166.0
110.3
124.9
(2.4)
6.0
4,404.8

(2,520.6)
(188.0)
12.9
10.2
(3.0)
(6.7)
0.7
(2,694.5)
(188.4)
2.4
(2,880.5)

2,210.3
2,100.7

4,038.4
3,902.0

1,524.3
1,471.5

73.9
0.9
4.4
(2.9)
–
(19.2)
(0.3)
(1.2)
55.6
11.5
2.8
(4.0)
0.2
66.1

(51.0)
(4.8)
2.7
14.8
0.4
–
1.0
(36.9)
(4.5)
3.9
(37.5)

28.6
18.7

Total
£m

13,183.9
691.2
–
(18.4)
0.8
(34.4)
–
(2.1)
13,821.0
861.4
–
(8.7)
69.4
14,743.1

(5,067.5)
(308.8)
17.3
25.0
–
(16.8)
1.7
(5,349.1)
(315.4)
7.0
(5,657.5)

630.5
604.3
(262.5)
(0.8)
–
–
7.5
–
979.0
514.9
(208.6)
(1.3)
–
1,284.0

–
–
–
–
–
–
–
–
–
–
–

1,284.0
979.0

9,085.6
8,471.9

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 2019
At 31 March 2018

Infrastructure
assets
£m

Fixed plant and
equipment
£m

114.8
115.8

4.0
6.4

Total
£m

118.8
122.2

The depreciation charge includes £nil (2018: £16.8 million) in respect of the write-off of redundant plant and equipment.

160

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

19. Interests in joint ventures

Particulars of the Group’s principal joint venture undertaking at 31 March 2019 were:

Name
Water Plus Limited

Type
Joint venture

Country of incorporation
Great Britain

Class of share capital held
Ordinary B

Proportion of ownership interest
50%

The results and net assets of the principal joint venture are shown below:

Group's share of carrying value
Group's share of (loss)/profit and comprehensive (loss)/income

All results are from continuing operations in both the current and preceding year.

Interests in joint venture
2018
£m
37.6
0.2

2019
£m
37.0
(0.4)

As at 31 March 2019 and 2018 the joint venture did not have any significant contingent liabilities to which the Group was exposed
and, other than is set out below, the Group did not have any significant contingent liabilities in relation to its interests in the joint
venture. The Group had no capital commitments in relation to its interests in the joint venture at 31 March 2019 or 2018.

The parent company has given guarantees in favour of Water Plus Limited in respect of the joint venture’s liabilities to wholesalers
in the Open Water market and its loan from Severn Trent Water Limited. The guarantee in respect of liabilities to wholesalers is
capped at £58.1 million (2018: £42.5 million) and the guarantee for the Severn Trent Water loan is for the amount due.
The registered office of Water Plus is Two Smithfield, Leonard Coates Way, Stoke-On-Trent, ST1 4FD.

20. Categories of financial assets

Fair value through profit and loss
Cross currency swaps – not hedge accounted
Interest rate swaps – not hedge accounted

Derivatives designated as hedging instruments
Cross currency swaps – fair value hedges
Energy hedges – cash flow hedges

Total derivative financial assets
Financial assets at amortised cost
Net trade receivables
Net accrued income
Contract assets
Other amounts receivable
Loan receivable from joint venture
Short term deposits
Cash at bank and in hand
Total financial assets at amortised cost
Total financial assets
Disclosed in the balance sheet as:
Non-current assets
Derivative financial assets
Trade and other receivables
Loan receivable from joint venture

Current assets
Derivative financial assets
Trade and other receivables
Cash at bank and in hand

Severn Trent Plc Annual Report and Accounts 2019

Note

21
21
21
21
21
22
22

2019
£m

18.0
26.1
44.1

19.1
5.3
24.4
68.5

221.5
223.3
35.1
64.6
142.0
–
41.0
727.5
796.0

68.4
47.6
142.0
258.0

0.1
496.9
41.0
538.0
796.0

2018
£m

5.8
11.4
17.2

18.7
0.3
19.0
36.2

191.0
215.2
39.1
44.2
135.6
16.4
34.7
676.2
712.4

36.0
3.9
135.6
175.5

0.2
440.9
51.1
492.2
667.7

161

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

21. Trade and other receivables

Current assets
Net trade receivables
Other amounts receivable
Contract assets
Prepayments
Net accrued income

Non-current assets
Other amounts receivable
Prepayments
Contract assets
Loan receivable from joint venture

2019
£m

2018
£m

221.5
48.9
3.2
16.6
223.3
513.5

15.7
14.4
31.9
142.0
204.0
717.5

191.0
38.7
4.0
11.5
211.2
456.4

1.5
9.1
35.1
135.6
181.3
637.7

The carrying values of trade and other receivables are reasonable approximations of their fair values.

Contract assets
Contract assets arise on the MOD contract when the value of work performed is greater than the amounts billed. Amounts billed
are determined based on a volumetric tariff for water supplied.

Movements on the contract assets were as follows:

At 1 April
Amounts billed
Revenue recognised
At 31 March

2019
£m
39.1
(46.1)
42.1
35.1

2018
£m
36.6
(44.7)
47.2
39.1

During the year no revenue was recognised from performance obligations satisfied in previous periods.

The total transaction price allocated to the remaining performance obligations represents the contracted revenue to be earned
by the Group for distinct services which the Group has promised to deliver to its customer. These include promises which are
partially satisfied at the period end. In deriving the transaction price, any element of variable revenue is estimated at a value that
is highly probable not to reverse in the future.

The total transaction price allocated to remaining performance obligation is £509.6 million, with £43.5 million receivable in 2020,
£43.9 million receivable in 2021 and £422.2 million receivable in 2022 onwards.

162

Severn Trent Plc Annual Report and Accounts 2019

21. Trade and other receivables continued
Bad debt provision
Movements on the bad debt provision were as follows:

At 1 April
Charge for bad and doubtful debts (continuing and discontinued operations)
Acquisition
Disposal of subsidiary undertaking
Amounts written off during the year
At 31 March

The aged analysis of receivables that are specifically provided for is as follows:

Trade receivables
Up to 90 days
91 – 365 days
1 – 2 years
2 – 3 years
More than 3 years

Strategic report
Governance
Group financial statements
Company financial statements
Other information

2019
£m
129.0
25.6
–
–
(34.4)
120.2

2019
£m

–
–
0.1
0.6
12.3
13.0

2018
£m
130.5
27.3
–
(1.2)
(27.6)
129.0

2018
£m

0.5
1.2
5.2
2.5
5.6
15.0

A collective provision is recorded for expected credit losses against assets for which no specific provision has been made. This is
calculated based on historical experience of bad debt write-offs. For the year ended 31 March 2018 there is no material difference
between the bad debt provision under IAS 39 and the provision for the lifetime expected credit losses under IFRS 9.

Debts are written off when there is no realistic expectation of further collection.

The aged analysis of expected credit loss provisions for receivables past due not individually provided for is as follows:

Up to 90 days
91 – 365 days
1 – 2 years
2 – 3 years
More than 3 years

2019
£m
58.5
88.0
60.3
38.7
74.9
320.4

2018
£m
43.6
80.0
57.5
40.7
77.4
299.2

Severn Trent Plc Annual Report and Accounts 2019

163

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

21. Trade and other receivables continued

The amounts above are reconciled to gross and net debtors in the table below:

Accrued income – not due
Trade receivables
Not due
Overdue not specifically provided
Overdue and specifically provided

Credit risk

Gross
£m
225.2

6.4
320.4
13.0
565.0

Provision
£m
(1.9)

–
(105.3)
(13.0)
(120.2)

2019
Net
£m
223.3

6.4
215.1
–
444.8

Gross
£m
215.2

5.8
299.2
15.0
535.2

Provision
£m
(1.2)

–
(112.8)
(15.0)
(129.0)

2018
Net
£m
214.0

5.8
186.4
–
406.2

Trade receivables
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 93% of Group turnover and 90% of net trade receivables.
Severn Trent Water has a statutory obligation to provide water and waste water services to domestic customers within its region.
Therefore there is no concentration of credit risk with respect to its trade receivables from these services and the credit quality of
its customer base reflects the wealth and prosperity of all of the domestic households within its region.

The expected credit loss rate is 1.9%.

Water Plus
In the current and prior year, the Group’s joint venture, Water Plus, was the largest retailer for non-domestic customers in the Severn
Trent region. The trade receivables and amounts shown as loans receivable from joint ventures are disclosed within note 44.

22. Cash and cash equivalents

Cash at bank and in hand
Short-term deposits

2019
£m
41.0
–
41.0

2018
£m
34.7
16.4
51.1

Short-term bank deposits are held as security deposits for insurance obligations, which are not available for use by the Group.
In addition, £14.7 million (2018: £9.8 million) of cash at bank and in hand is restricted for use on the MOD contract and is not
available for use by the Group.

23. Borrowings

Current liabilities
Bank overdraft
Bank loans
Other loans
Finance leases

Non-current liabilities
Bank loans
Other loans
Finance leases

2019
£m

1.4
188.7
2.8
4.1
197.0

931.4
4,817.7
108.1
5,857.2
6,054.2

2018
£m

12.6
287.9
5.3
2.9
308.7

929.5
4,218.6
111.0
5,259.1
5,567.8

164

Severn Trent Plc Annual Report and Accounts 2019

24. Finance leases

Obligations under finance leases are due as follows:

Within 1 year
1 – 2 years
2 – 5 years
After more than 5 years
Gross obligations under finance leases
Less future finance charges
Present value of lease obligations

Net obligations under finance leases fall due as follows:

Within 1 year
1 – 2 years
2 – 5 years
After more than 5 years
Included in non-current liabilities

Strategic report
Governance
Group financial statements
Company financial statements
Other information

2019
£m
7.3
7.8
26.3
103.7
145.1
(32.9)
112.2

2019
£m
4.1
4.1
16.1
87.9
108.1
112.2

2018
£m
6.5
7.0
24.3
113.1
150.9
(37.0)
113.9

2018
£m
2.9
3.2
13.7
94.1
111.0
113.9

The remaining terms of finance leases ranged from 1 to 13 years at 31 March 2019. Interest terms are set at the inception of the
leases. The leases bear fixed interest at a weighted average rate of 5.34% (2018: 5.34%). 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.

Severn Trent Plc Annual Report and Accounts 2019

165

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

25. Categories of financial liabilities

Fair value through profit and loss
Interest rate swaps – not hedge accounted
Inflation swaps – not hedge accounted

Derivatives designated as hedging instruments
Interest rate swaps – cash flow hedges
Energy hedges – cash flow hedges

Total derivative financial liabilities
Other financial liabilities
Borrowings
Trade payables
Other payables
Total other financial liabilities
Total financial liabilities
Disclosed in the balance sheet as:
Non-current liabilities
Derivative financial liabilities
Other payables
Borrowings

Current liabilities
Borrowings
Trade payables
Other payables

26. Trade and other payables

Current liabilities
Trade payables
Social security and other taxes
Other payables
Accruals
Deferred income

Non-current liabilities
Other payables
Accruals
Deferred income

Note

23
26

2019
£m

94.1
6.2
100.3

25.8
0.4
26.2
126.5

6,054.2
32.2
29.9
6,116.3
6,242.8

126.5
8.4
5,857.2
5,992.1

197.0
32.2
21.5
250.7
6,242.8

2019
£m

32.2
11.5
21.5
412.6
18.9
496.7

8.4
0.4
1,074.1
1,082.9
1,579.6

2018
£m

98.8
2.8
101.6

13.6
0.8
14.4
116.0

5,567.8
18.9
21.6
5,608.3
5,724.3

116.0
–
5,259.1
5,375.1

308.7
18.9
21.6
349.2
5,724.3

2018
£m

18.9
6.9
21.6
400.3
14.9
462.6

–
0.4
1,009.0
1,009.4
1,472.0

166

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

27. 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 2017
Charge/(credit) to income
Charge for adjustments to provisional fair values
Charge to equity
At 1 April 2018
Restatement
At 1 April 2018 restated
Charge/(credit) to income
Acquired on acquisition
Charge/(credit) to equity arising from rate change
At 31 March 2019

Accelerated tax
depreciation
£m
758.9
24.5
0.1
–
783.5
–
783.5
36.3
3.8
–
823.6

Retirement
benefit
obligations
£m
(78.7)
(0.3)
–
16.9
(62.1)
–
(62.1)
(2.3)
–
21.7
(42.7)

Fair value
of financial
instruments
£m
(46.1)
1.6
–
2.4
(42.1)
–
(42.1)
5.2
–
(0.2)
(37.1)

Other
£m
(10.4)
3.2
1.0
1.3
(4.9)
0.8
(4.1)
(1.6)
9.4
–
3.7

Total
£m
623.7
29.0
1.1
20.6
674.4
0.8
675.2
37.6
13.2
21.5
747.5

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

28. Retirement benefit schemes

a) Defined benefit pension schemes

2019

£m
(79.8)
827.3
747.5

2018
(restated)
£m
(108.4)
783.6
675.2

(i) Background
The Group operates a number of defined benefit pension schemes. The Severn Trent Pension Scheme and the Severn Trent
Mirror Image Pension Scheme closed to future accrual on 31 March 2015, while the Dee Valley Water Limited Section of the Water
Companies Pension Scheme, which is a sectionalised scheme, currently remains open to accrual. The defined benefit pension
schemes cover increases in accrued benefits arising from inflation and pension increases. 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 by reference to their
pensionable service and pensionable salary history, with inflationary pension increases applying in line with the scheme rules.

The defined benefit pension schemes and the dates of their last completed formal actuarial valuations as at the accounting date
are as follows:

Severn Trent Pension Scheme (STPS)*
Severn Trent Mirror Image Pension Scheme (STMIPS)
Water Companies Pension Scheme – Dee Valley Water Limited Section (DVWS)

Date of last formal actuarial valuation
31 March 2016
31 March 2016
31 March 2017

The STPS is by far the largest of the Group’s UK defined benefit schemes, comprising over 90% of the Group’s overall defined benefit obligations.

Severn Trent Plc Annual Report and Accounts 2019

167

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

28. Retirement benefit schemes continued

a) Defined benefit pension schemes continued

(ii) Amount included in the balance sheet arising from the Group’s obligations under the defined benefit pension schemes

Fair value of assets
Present value of the defined benefit obligations

Presented on the balance sheet as:
Retirement benefit obligation – funded schemes in surplus
Retirement benefit obligation – funded schemes in deficit
Retirement benefit obligation – unfunded schemes

Net retirement benefit obligation

Fair value of scheme assets
Equities
Diversified growth funds
Corporate bonds
Liability-driven investment funds (‘LDIs’)
Property
Emerging markets multi-asset funds
High-yield bonds
Hedge funds
Cash

The majority of the assets have quoted prices in active markets, but there are a small proportion of the equity and LDI
investments which are unquoted.

Movements in the fair value of the scheme assets were as follows:

Fair value at 1 April
Interest income on scheme assets
Contributions from the sponsoring companies
Contributions from scheme members
Return on plan assets (excluding amounts included in finance income)
Scheme administration costs
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
Exceptional past service (cost)/credit
Interest cost
Contributions from scheme members
Actuarial gains arising from changes in demographic assumptions
Actuarial (losses)/gains arising from changes in financial assumptions
Actuarial gains arising from experience adjustments
Benefits paid
Present value at 31 March

2019
£m

2,339.8
61.0
34.9
0.1
95.9
(2.3)
(110.5)
2,418.9

2019
£m
(2,859.6)
(0.2)
(9.6)
(74.8)
(0.1)
55.7
(132.7)
39.0
110.5
(2,871.8)

168

Severn Trent Plc Annual Report and Accounts 2019

2019
£m
2,418.9
(2,871.8)
(452.9)

18.6
(462.9)
(8.6)
(471.5)
(452.9)

2018
£m
2,339.8
(2,859.6)
(519.8)

18.2
(529.3)
(8.7)
(538.0)
(519.8)

2019
£m

2018
£m

356.6
–
899.2
746.0
228.2
–
31.3
–
157.6
2,418.9

360.4
5.3
825.7
783.1
180.7
3.9
3.4
0.6
176.7
2,339.8

2018
£m
2,352.8
62.0
35.2
0.1
(1.3)
(1.8)
(107.2)
2,339.8

2018
£m
(2,927.4)
(0.5)
8.3
(77.5)
(0.1)
21.6
6.9
1.9
107.2
(2,859.6)

Strategic report
Governance
Group financial statements
Company financial statements
Other information

28. Retirement benefit schemes continued

a) Defined benefit pension schemes continued

(ii) Amount included in the balance sheet arising from the Group’s obligations under the defined benefit pension schemes

continued

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 (2018: £8.7 million)
is included as an unfunded scheme within the retirement benefit obligation.

The Group has assessed that is has an unconditional right to a refund of any surplus assets in each of the schemes following
settlement of all obligations to scheme members and therefore the surplus in DVWS has been recognised in full.

(iii) Amounts recognised in the income statement in respect of these defined benefit pension schemes

Amounts (charged)/credited to operating costs:
Current service cost
Exceptional past service (cost)/credit
Scheme administration costs

Amounts charged to finance costs:
Interest cost
Amounts credited to finance income:
Interest income on scheme assets
Total amount credited to the income statement

2019
£m

(0.2)
(9.6)
(2.3)
(12.1)

2018
£m

(0.5)
8.3
(1.8)
6.0

(74.8)

(77.5)

61.0
(25.9)

62.0
(9.5)

The actual return on scheme assets was a gain of £156.9 million (2018: £60.7 million).

Actuarial gains and losses have been reported in the statement of comprehensive income.

On 26 October 2018, the High Court issued a judgment in a claim involving Lloyds Banking Group’s defined benefit pension
schemes. This judgment concluded the schemes should be amended to equalise pension benefits for men and women in relation
to guaranteed minimum pension benefits. The issues determined by the judgment have a potential consequence for the schemes.
The Group has estimated the cost of equalising benefits, and has allowed for this cost within the exceptional past service cost item
in 2018/19. Any subsequent changes to this amount in future periods will be treated as a change in actuarial assumption, and as
such will be recognised in other comprehensive income.

(iv) Actuarial risk factors
The schemes typically expose the Group to actuarial risks such as investment risk, inflation risk and longevity risk.

Investment risk
The Group’s contributions to the schemes are based on actuarial calculations which make assumptions about the returns
expected from the schemes’ investments. If the investments underperform these assumptions in the long-term then the Group
may need to make additional contributions to the schemes in order to fund the payment of accrued benefits.

Each plan’s investment strategy seeks to balance the level of investment return sought with the aim of reducing volatility and risk.
In undertaking this approach reference is made to both the maturity of liabilities and the funding level of that plan. A number of
further strategies are employed to manage underlying risks, including liability-matching asset strategies, diversification of asset
portfolios and interest rate hedging.

Currently the plan has a balanced approach to investment in equity securities, debt instruments and real estate. Due to the
long-term nature of the plan liabilities, we consider it appropriate to invest a portion of the plan assets in equity securities and
in real estate to leverage the return generated by the fund.

Inflation risk
The benefits payable to members of the schemes are linked to inflation measured by the RPI or CPI, subject to caps. The Group’s
contributions to the schemes are based on assumptions about the future level of inflation. If inflation is higher than the levels
assumed in the actuarial calculations then the Group may need to make additional contributions to the schemes in order to fund
the payment of accrued benefits.

The schemes use LDIs within the asset portfolios to hedge against the value of liabilities changing as a result of movements in
long-term interest rate and inflation expectations. This structure allows the schemes to both hedge against these risks and retain
capital investment in assets that are expected to generate higher returns.

Severn Trent Plc Annual Report and Accounts 2019

169

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

28. Retirement benefit schemes continued

a) Defined benefit pension schemes continued

(iv) Actuarial risk factors continued

Longevity risk
The Group’s contributions to the schemes are based on assumptions about the life expectancy of scheme members after
retirement. If scheme members live longer than assumed in the actuarial calculations then the Group may need to make
additional contributions to the schemes in order to fund the payment of accrued benefits.

(v) Actuarial assumptions
The major financial assumptions used in the accounting valuation of the obligations for the STPS which represents by far the
largest defined benefit obligation for the Group were as follows.

Price inflation – RPI
Price inflation – CPI
Discount rate
Pension increases in payment
Pension increases in deferment

2019
%
3.2
2.2
2.5
3.2
3.2

2018
%
3.1
2.1
2.7
3.1
3.1

The assumption for price inflation is derived from the difference between the yields on longer term fixed rate gilts and on
index-linked gilts.

In setting our discount rate, we construct a yield curve. Short-dated yields are taken from market rates for AA corporate bonds.
Long-dated yields for the curve are based on the average yield available on all long-dated AA corporate bonds. We project the
expected cash flows of the schemes and adopt a single equivalent cash flow weighted discount rate based on this constructed
yield curve.

The mortality assumptions are based on those used in the latest triennial funding valuations. The mortality assumptions adopted
at the year end for accounting purposes and the life expectancies at age 65 implied by the assumptions are as follows for
the STPS:

Mortality table used
Mortality table compared with standard table
Mortality projections
Future improvement per annum
Remaining life expectancy for members currently aged 65 years
Remaining life expectancy at age 65 for members currently aged 45 years

Men
S2NMA
95%
CMI 2018
1.0%
21.9
22.9

2019
Women
S2NFA
99%
CMI 2018
1.0%
23.6
24.8

Men
S2NMA
95%
CMI 2017
1.0%
22.4
23.4

2018
Women
S2NFA
99%
CMI 2017
1.0%
24.1
25.3

The calculation of the scheme obligations is sensitive to the actuarial assumptions and in particular to the assumptions relating to
discount rate, price inflation (capped, where relevant) and mortality. The following table summarises the estimated impact on the
Group’s obligations from changes to key actuarial assumptions whilst holding all other assumptions constant.

Assumption
Discount rate1
Price inflation2
Mortality3

Change in assumption
Increase/decrease by 0.1% pa
Increase/decreased by 0.1% pa
Increase in life expectancy by 1 year

Impact on disclosed obligations
Decrease/increase by £46/£47 million
Increase/decrease by £40/£39 million
Increase by £106 million

1 A change in discount rate is likely to occur as a result of changes in bond yield and as such would be expected to be offset to a significant degree by a change in the

value of the bond assets held by the plans.

2 The projected impact resulting from a change in RPI reflects the underlying effect on pensions in payment, pensions in deferment and resultant increases in

salary assumptions.

3 The change in assumption is based on triennial valuations and reflect the fact that life expectancy rates are expected to increase.

In reality, interrelationships exist between the assumptions, particularly between the discount rate and price inflation. The above
analysis does not take into account the effect of these interrelationships. Also, in practice any movement in obligations arising
from assumption changes are likely to be accompanied by movements in asset values – and so the impact on the accounting
deficit may be lower than the impact on the obligations shown above.

In presenting the above sensitivity analysis, the present value of the defined benefit obligation has been calculated using the
projected unit credit method at the end of the reporting period, which is the same as that applied in calculating the defined benefit
obligation liability recognised in the balance sheet.

170

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

28. Retirement benefit schemes continued

a) Defined benefit pension schemes continued

(i) Effect on future cash flows
Contribution rates are set in consultation with the trustees for each scheme and each participating employer.

The average duration of the benefit obligation at the end of the year is 16 years for STPS and STMIPS (2018: 17 years) and 15 years
for DVWS (2018: 16 years).

The most recent completed formal triennial actuarial valuations and funding agreements were carried out as at 31 March 2016
for the STPS and STMIPS schemes and 31 March 2017 for DVWS. As a result of the STPS and STMIPS actuarial valuations, deficit
reduction contributions of £25 million were paid in the year ended 31 March 2017 and £10 million for each of the subsequent
financial years ending 31 March 2019 were agreed. Payments of £8 million per annum through an asset-backed funding
arrangement will continue to 31 March 2032. Further inflation-linked payments of £15 million per annum are being made through
an additional asset-backed funding arrangement, with payments having started in the financial year ending 31 March 2018 and
continuing to 31 March 2031. These contributions will cease earlier should a subsequent valuation of the STPS show that these
contributions are no longer needed.

b) Defined contribution pension schemes
The Group also operates the Severn Trent Group Personal Pension, a defined contribution scheme, for its UK employees.

The total cost charged to operating costs of £23.4 million (2018: £20.3 million) represents contributions payable to these schemes
by the Group at rates specified in the rules of the scheme. As at 31 March 2019 no contributions (2018: nil) in respect of the current
reporting period were owed to the schemes.

Hafren Dyfrdwy operates two defined contribution pension schemes, neither of which were material in either the current or
prior year.

29. Provisions for liabilities

At 1 April 2018
Charged to income statement
Utilisation of provision
Unwinding of discount
Acquisition of subsidiary
At 31 March 2019

Included in:
Current liabilities
Non-current liabilities

Restructuring
£m
0.8
–
(0.5)
–
–
0.3

Insurance
£m
23.3
5.2
(5.1)
–
–
23.4

Other
£m
27.2
7.0
(7.2)
0.2
0.5
27.7

2019
£m

32.2
19.2
51.4

Total
£m
51.3
12.2
(12.8)
0.2
0.5
51.4

2018
£m

40.6
10.7
51.3

The restructuring provision reflects costs to be incurred in respect of committed restructuring programmes. The associated
outflows are estimated to arise over a period of up to two years from the balance sheet date.

Insurance includes provisions in respect of Derwent Insurance Limited and Lyra Insurance Guernsey Limited, captive insurance
companies, which are wholly owned subsidiaries of the Group, and insurance deductions in Severn Trent Water Limited.
The associated outflows are estimated to arise over a period of up to five years from the balance sheet date.

Other provisions include provisions for dilapidations, commercial disputes, either from continuing or discontinued operations,
and potential environmental claims. The associated outflows are estimated to arise over a period up to ten years from the balance
sheet date.

Severn Trent Plc Annual Report and Accounts 2019

171

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

30. Share capital

Total issued and fully paid share capital
240,943,929 ordinary shares of 9717/19p (2018: 240,222,617)

At 31 March 2019, 3,774,921 treasury shares were held (2018: 3,948,599).

Changes in share capital were as follows:

Ordinary shares of 9717/19p
At 1 April 2017
Shares issued under the Employee Sharesave Scheme
At 1 April 2018
Shares issued under the Employee Sharesave Scheme
At 31 March 2019

31. Share premium

At 1 April
Share premium arising on issue of shares for Employee Sharesave Scheme
At 31 March

32. Other reserves

At 1 April 2017
Total comprehensive (loss)/income for the year
Transfer to retained earnings
At 1 April 2018
Total comprehensive loss for the year
At 31 March 2019

Capital
redemption
reserve
£m
157.1
–
–
157.1
–
157.1

Translation
reserve
£m
40.4
(31.4)
(9.0)
–
–
–

2019
£m

2018
£m

235.9

235.1

Number

£m

239,793,915
428,702
240,222,617
721,312
240,943,929

2019
£m
117.7
10.3
128.0

Hedging
reserve
£m
(75.7)
11.6
–
(64.1)
(0.2)
(64.3)

234.7
0.4
235.1
0.8
235.9

2018
£m
112.5
5.2
117.7

Total
£m
121.8
(19.8)
(9.0)
93.0
(0.2)
92.8

The capital redemption reserve arose on the redemption of B shares.

The translation reserve arises from exchange differences on translation of the results and financial position of
foreign subsidiaries.

The hedging reserve arises from gains or losses on interest rate swaps taken directly to equity under the hedge accounting
provisions of IFRS 9 and the transition rules of IFRS 1.

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33. 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 manage exposure to movements in interest rates to provide an appropriate degree of certainty as to its cost of funds;

• to minimise exposure to counterparty credit risk;

• to provide the Group with an appropriate degree of certainty as to its foreign exchange exposure;

• 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 monitors future funding requirements and credit market conditions to ensure continued
availability of funds.

The Group has continued to carefully monitor market conditions and our interest rate exposure. Given the low, flat yield curve
we believe it is the right time to start reducing our exposure to floating interest rates. At 31 March 2019, 22% of our gross debt
portfolio was at floating rates, with a further 25% of index linked debt and 53% of fixed rate debt.

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 Board has decided to set the 2018/19 dividend
at 93.37 pence, an increase of 7.9% compared to the total dividend for 2017/18 of 86.55 pence. Our policy is to grow the dividend
annually at no less than RPI plus 4% until March 2020.

The Group’s capital at 31 March was:

Net cash and cash equivalents
Bank loans
Other loans
Finance leases
Cross currency swaps
Loans due from joint ventures and associated undertakings
Net debt
Equity attributable to owners of the Company
Total capital

2019
£m
39.6
(1,120.1)
(4,820.5)
(112.2)
37.1
142.0
(5,834.1)
(1,164.1)
(6,998.2)

2018
£m
38.5
(1,217.4)
(4,223.9)
(113.9)
24.5
135.6
(5,356.6)
(996.9)
(6,353.5)

Severn Trent Plc Annual Report and Accounts 2019

173

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

34. Fair values of financial instruments

a) Fair value measurements
The valuation techniques that the Group applies in determining the fair values of its financial instruments on a recurring basis
are described below. The techniques are classified under the hierarchy defined in IFRS 13 which categorises valuation techniques
into Levels 1– 3 based on the degree to which the fair value is observable. The Group’s valuation techniques include Levels 2 and 3
given the wide range of financial instruments below:

Cross currency swaps
Assets

2019
£m

37.1

2018

£m Valuation techniques and key inputs

Discounted cash flow

24.5 Future cash flows are estimated based on forward interest rates from

Interest rate swaps
Assets
Liabilities

Energy swaps
Assets
Liabilities

Inflation swaps
Liabilities

26.1
(119.9)

11.4
(112.4)

5.3
(0.4)

0.3
(0.8)

observable yield curves at the period end and contract interest rates
discounted at a rate that reflects the credit risk of counterparties. The
currency cash flows are translated at spot rate.
Discounted cash flow
Future cash flows are estimated based on forward interest rates from
observable yield curves at the period end and contract interest rates
discounted at a rate that reflects the credit risk of counterparties.
Discounted cash flow
Future cash flows are estimated based on forward electricity prices from
observable indices at the period end and contract prices discounted at a
rate that reflects the credit risk of counterparties.
Discounted cash flow

(6.2)

(2.8) Future cash flows on the RPI leg of the instrument are estimated based on

observable forward inflation indices.
Future cash flows on the CPI leg of the instrument are estimated based on
the future expected differential between RPI and CPI.
Both legs are discounted using observable swap rates at the period end, at
a rate that reflects the credit risk of counterparties. This is considered to
be a Level 3 valuation technique.

Contingent consideration

(3.0)

– Management estimate of the amount that is likely to be payable. This is

considered to be a Level 3 valuation technique.
The contingent consideration arose on the acquisition of Agrivert (note 38).

Changes in the carrying values of instruments that are measured using a Level 3 technique were as follows:

At 1 April 2017
Losses recognised in profit or loss
At 31 March 2018
Losses recognised in profit or loss
Recognised on acquisition of subsidiary
At 31 March 2019

Inflation
swaps
£m
–
(2.8)
(2.8)
(3.4)
–
(6.2)

Contingent
consideration
£m
–
–
–
–
(3.0)
(3.0)

174

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34. Fair values of financial instruments continued

b) Comparison of fair value of financial instruments with their carrying amounts
The Directors consider that the carrying amounts of cash and short term deposits, bank overdrafts, loans receivable from joint
ventures, trade receivables and trade payables approximate their fair values. The carrying values and estimated fair values of
other financial instruments are set out below:

Floating rate debt
Bank loans
Currency bonds
Floating rate notes

Fixed rate debt
Bank loans
Sterling bonds
Fixed rate notes
Other loans
Finance leases

Index-linked debt
Bank loans
Sterling bonds
Other loans

Carrying value
£m

2019
Fair value
£m

Carrying value
£m

2018
Fair value
£m

818.1
37.9
147.7
1,003.7

184.1
2,591.1
673.3
2.8
112.2
3,563.5

117.9
1,279.1
88.6
1,485.6
6,052.8

818.3
37.9
148.0
1,004.2

183.3
2,956.8
707.4
2.8
119.6
3,969.9

126.7
2,104.4
67.2
2,298.3
7,272.4

917.1
38.2
147.7
1,103.0

185.3
2,357.0
343.4
5.3
113.9
3,004.9

115.0
1,244.1
88.2
1,447.3
5,555.2

918.6
38.2
153.0
1,109.8

185.0
2,700.2
347.6
5.3
122.5
3,360.6

124.9
2,057.1
87.1
2,269.1
6,739.5

The above classification does not take into account the impact of unhedged interest rate swaps or cross currency swaps.

Fixed rate sterling and currency bonds are valued using market prices for similar instruments, which is a Level 2
valuation technique.

Index-linked bonds are rarely traded and therefore quoted prices are not considered to be a reliable indicator of fair value.
Therefore, these bonds are valued using discounted cash flow models with discount rates derived from observed market prices
for a sample of bonds, which is a Level 3 valuation technique.

Fair values of the other debt instruments are also calculated using discounted cash flow models, which is a Level 3
valuation technique.

Severn Trent Plc Annual Report and Accounts 2019

175

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

35. Risks arising from financial instruments

The Group’s activities expose it to a variety of financial risks:

• market risk (including interest rate risk, exchange rate risk and other price 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. The Board
has established a Treasury Committee to monitor treasury activities and to facilitate timely responses to changes in market
conditions when necessary. Group Treasury identifies, evaluates and hedges financial risks in close co-operation with the Group’s
operating units. The Board defines 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.
The Group’s policy is that derivative financial instruments are not held for trading but may be used to mitigate the Group’s
exposure to financial risk. The types of derivative instruments held and the related risks are described below.

Interest rate swaps are held to mitigate the Group’s exposure to changes in market interest rates. Further details are set out in
section a) (i) and note 36 b) (i).

Cross currency swaps are held to mitigate the Group’s exposure to exchange rate movements on amounts borrowed in foreign
currencies. Further details are set out in section a) (ii) and 36 a) (i).

Energy swaps are held to mitigate the Group’s exposure to changes in electricity prices. Further details are provided in
note 36 b) (ii).

Severn Trent Water, the Group’s most significant business unit, operates under a regulatory environment where its prices are
linked to inflation measured by RPI. In order to mitigate the risks to cash flow and earnings arising from fluctuations in RPI,
the Group holds debt instruments where the principal repayable and interest cost is linked to RPI.

a) Market risk
The Group is exposed to fluctuations in interest rates and, to a lesser extent, exchange rates. The nature of these risks and the
steps that the Group has taken to manage them are described below.

(i) Interest rate risk
The Group’s income and its 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 the risk of adverse cash flow impacts from increases in interest rates.

Borrowings issued at fixed rates expose the Group to the risk of interest costs above the market rate when interest
rates decrease.

176

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Other information

35. Risks arising from financial instruments continued

a) Market risk continued

(i) Interest rate risk continued
The Group’s policy is to maintain 40% to 70% of its interest bearing liabilities in fixed rate instruments during AMP6. In measuring
this metric, management makes adjustments to the carrying value of debt to better reflect the amount that interest is calculated
on. Details of the adjustments made are set out below:

Net debt (note 40)
Cash and short term deposits
Loan receivable from joint ventures and associates
Cross currency swaps included in net debt at fair value
Fair value hedge accounting adjustments
Exchange on currency debt not hedge accounted
Interest bearing financial liabilities

2019
£m
5,834.1
41.0
142.0
37.1
(28.8)
(16.7)
6,008.7

2018
£m
5,356.6
51.1
135.6
24.5
(30.4)
(8.5)
5,528.9

The Group manages its cash flow interest rate risk by borrowing at fixed or index-linked rates or by using interest rate swaps.
Under these swaps the Group receives variable rate interest and pays fixed rate interest calculated by reference to the agreed
notional principal amounts. In practice the swaps are settled by transferring the net amount. These swaps have the economic
effect of converting borrowings from variable rates to fixed rates. The Group has entered into a series of these interest rate swaps
to hedge future interest payments beyond 2030.

The following tables show analyses of the Group’s interest bearing financial liabilities by type of interest. Debt which is hedged by
interest rate swaps or cross currency swaps is included in the category after taking account of the impact of the swap. Debt raised
in foreign currencies has been included at the notional sterling value of the payable leg of the corresponding cross currency swap
since this is the amount that is exposed to changes in interest rates.

Valuation adjustments that do not impact the amount on which interest is calculated, such as fair value hedge accounting
adjustments, are excluded from this analysis.

The net principal amount of unhedged swaps is shown as an adjustment to floating rate and fixed rate debt to demonstrate the
impact of the swaps on the amount of liabilities bearing fixed interest.

2019
Overdrafts
Bank loans
Other loans
Finance leases

Impact of swaps not matched against specific debt instruments
Interest bearing financial liabilities
Proportion of interest bearing financial liabilities that are fixed
Weighted average interest rate of fixed debt
Weighted average period for which interest is fixed (years)

2018
Overdrafts
Bank loans
Other loans
Finance leases

Floating
rate
£m
(1.4)
(818.1)
(169.1)
–
(988.6)
(348.4)
(1,337.0)

Floating
rate
£m
(12.6)
(917.1)
(167.6)
–
(1,097.3)
(349.6)
(1,446.9)

Fixed
rate
£m
–
(184.1)
(3,238.3)
(112.2)
(3,534.6)
348.4
(3,186.2)
53%
4.19%
8.8

Fixed
rate
£m
–
(185.3)
(2,685.0)
(113.9)
(2,984.2)
349.6
(2,634.6)
48%
4.30%
8.8

Index-linked
£m
–
(117.9)
(1,367.6)
–
(1,485.5)
–
(1,485.5)

Total
£m
(1.4)
(1,120.1)
(4,775.0)
(112.2)
(6,008.7)
–
(6,008.7)

Index-linked
£m
–
(115.0)
(1,332.3)
–
(1,447.3)
–
(1,447.3)

Total
£m
(12.6)
(1,217.4)
(4,184.9)
(113.9)
(5,528.8)
–
(5,528.8)

Severn Trent Plc Annual Report and Accounts 2019

177

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

35. Risks arising from financial instruments continued

a) Market risk continued

(i) Interest rate risk continued

Interest rate swaps not hedge accounted
The Group has a number of interest rate swaps which are not accounted for as cash flow or fair value hedges. This has led to a
credit of £19.7 million (2018: £7.9 million) in the income statement.

Pay fixed rate interest
2 – 5 years
5 – 10 years
10 – 20 years

Receive fixed rate interest
5 – 10 years
10 – 20 years

Average contract
fixed interest rate
2018
%

2019
%

Notional principal amount
2018
£m

2019
£m

4.98
5.14
5.45
5.13

3.36
2.75
2.97

–
5.06
5.46
5.16

3.36
2.75
3.01

(150.0)
(150.0)
(75.0)
(375.0)

225.0
400.0
625.0
250.0

–
(300.0)
(73.7)
(373.7)

225.0
400.0
625.0
251.3

2019
£m

(25.8)
(34.9)
(33.5)
(94.2)

15.8
10.4
26.2
(68.0)

Fair value
2018
£m

–
(65.6)
(32.6)
(98.2)

11.4
(0.6)
10.8
(87.4)

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
(48.5)
(10.8)
(48.5)

2019
-1.0%
£m
54.3
10.8
54.3

+1.0%
£m
(47.7)
(11.5)
(47.7)

2018
-1.0%
£m
53.9
(11.5)
53.9

(ii) Exchange rate risk
Except for debt raised in foreign currency, which is hedged, the Group’s business does not involve significant exposure to foreign
exchange transactions. 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, and therefore the sensitivity of the Group’s results to changes in
exchange rates is not material.

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. These contracts led to a no charge (2018: nil) in the income statement.

In order to meet its objective of accessing a broad range of sources of finance, the Group has raised debt denominated in
currencies other than sterling. In order to mitigate the Group’s exposure to exchange rate fluctuations, cross currency swaps
were entered into at the time that the debt was drawn down to swap the proceeds into sterling debt bearing interest based
on LIBOR.

Where the terms of the receivable leg of the swap closely match the terms of the underlying debt, the swaps are expected to be
effective hedges, hence the swaps have been accounted for as fair value hedges. The notional values and fair values of these
swaps are shown in note 36 a).

The Group also has cross currency swaps with a sterling value of £98.3 million (2018: £98.3 million) which are not accounted
for as fair value hedges. Economically these swaps act to mitigate the exchange rate risk of debt within the Group which is
denominated in foreign currency, but they are not designated hedges under IFRS 9. This has led to a credit of £12.2 million (2018:
charge of £17.7 million) in the income statement which is partly offset by the exchange loss of £8.6 million (2018: exchange gain of
£12.7 million) on the underlying debt.

178

Severn Trent Plc Annual Report and Accounts 2019

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Governance
Group financial statements
Company financial statements
Other information

35. Risks arising from financial instruments continued

a) Market risk continued

(ii) Exchange rate risk continued
The Group’s gross and net currency exposures arising from currency borrowings are summarised in the tables below.
These show, in the relevant currency, the amount borrowed and the notional principal of the related swap or forward contract.
The net position shows the Group’s exposure to exchange rate risk in relation to its currency borrowings.

2019
Borrowings by currency
Cross currency swaps – hedge accounted
Cross currency swaps – not hedge accounted
Net currency exposure

2018
Borrowings by currency
Cross currency swaps – hedge accounted
Cross currency swaps – not hedge accounted
Net currency exposure

Euro
€m
(20.1)
19.9
–
(0.2)

Euro
€m
(20.2)
19.9
–
(0.3)

US dollar
$m
(180.0)
30.0
150.0
–

US dollar
$m
(150.0)
–
150.0
–

Yen
¥bn
(2.0)
2.0
–
–

b) 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 and Hafren Dyfrdwy Cyfyngedig,
whose operating licences oblige them 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 21.

Cash deposits and derivative contracts are only placed with high credit quality financial institutions, which have been approved
by the Board. Group Treasury monitors the credit quality of the approved financial institutions and the list of financial institutions
that may be used is approved annually by the Board. 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:

Double A range
Single A range
Triple B range

2019
£m
105.0
700.0
–
805.0

Credit limit
2018
£m
105.0
650.0
10.0
765.0

The fair values of derivative assets analysed by credit ratings of counterparties were as follows:

Double A range
Single A range

Amount
deposited
2018
£m
–
11.1
5.3
16.4

Derivative
assets
2018
£m
–
36.2
36.2

2019
£m
–
–
–
–

2019
£m
1.4
67.1
68.5

Severn Trent Plc Annual Report and Accounts 2019

179

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

35. Risks arising from financial instruments continued

c) Liquidity risk

(i) Committed facilities
Prudent liquidity management requires sufficient cash balances to be maintained; adequate committed facilities to be available;
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:

2 – 5 years

2019
£m
885.0

2018
£m
710.0

(ii) Cash flows from non-derivative financial instruments
The following tables show the estimated cash flows that will arise from the Group’s 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.

Interest and inflation assumptions are based on prevailing market conditions at the year end date.

2019

Undiscounted amounts payable:
Within 1 year
1 – 2 years
2 – 5 years
5 – 10 years
10 – 15 years
15 – 20 years
20 – 25 years
25 – 30 years
30 – 35 years
35 – 40 years
40 – 45 years
45 – 50 years
Total

Undiscounted amounts receivable:
Within 1 year
1 – 2 years
Total

Floating rate
£m
(202.2)
(14.4)
(352.3)
(469.2)
(50.8)
–
–
–
–
–
–
–
(1,088.9)

Fixed rate
£m
(122.8)
(276.4)
(1,165.6)
(1,359.6)
(1,206.0)
(246.1)
(413.4)
–
–
–
–
–
(4,789.9)

Index-linked
£m
(28.8)
(30.9)
(321.6)
(412.3)
(217.9)
(145.6)
(176.3)
(208.5)
(652.7)
(3,248.6)
(22.8)
(358.6)
(5,824.6)

Trade payables
£m
(32.2)
–
–
–
–
–
–
–
–
–
–
–
(32.2)

Payments
on financial
liabilities
£m
(386.0)
(321.7)
(1,839.5)
(2,241.1)
(1,474.7)
(391.7)
(589.7)
(208.5)
(652.7)
(3,248.6)
(22.8)
(358.6)
(11,735.6)

Loans due from
joint ventures
£m
–
142.0
142.0

Trade
and other
receivables
£m
496.9
47.6
544.5

Cash and short
term deposits
£m
41.0
–
41.0

Receipts from
financial assets
£m
537.9
189.6
727.5

180

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

35. Risks arising from financial instruments continued

c) Liquidity risk continued

(ii) Cash flows from non-derivative financial instruments continued

2018

Undiscounted amounts receivable:
Within 1 year
1 – 2 years
5 – 10 years
Total

Floating rate
£m
(311.4)
(10.3)
(41.3)
(785.3)
(52.7)
–
–
–
–
–
–
–
(1,201.0)

Fixed rate
£m
(136.0)
(116.1)
(982.6)
(1,333.6)
(1,056.0)
(60.9)
(298.8)
–
–
–
–
–
(3,984.0)

Index-linked
£m
(27.8)
(29.4)
(325.7)
(199.9)
(436.2)
(139.0)
(167.7)
(199.2)
(649.7)
(2,273.6)
(1,068.1)
(374.2)
(5,890.5)

Trade payables
£m
(18.9)
–
–
–
–
–
–
–
–
–
–
–
(18.9)

Payments
on financial
liabilities
£m
(494.1)
(155.8)
(1,349.6)
(2,318.8)
(1,544.9)
(199.9)
(466.5)
(199.2)
(649.7)
(2,273.6)
(1,068.1)
(374.2)
(11,094.4)

Loans due from
joint ventures
£m
–
126.3
12.5
138.8

Trade
receivables
£m
191.0
–
–
191.0

Cash and short
term deposits
£m
51.1
–
–
51.1

Receipts from
financial assets
£m
242.1
126.3
12.5
380.9

Index-linked debt includes loans with maturities up to 50 years. The principal is revalued at fixed intervals and is linked to
movements in the RPI. Interest payments are made biannually based on the revalued principal. The principal repayment equals
the revalued amount at maturity. The payments included in the table above are estimates based on the forward inflation rates
published by the Bank of England at the balance sheet date.

Severn Trent Plc Annual Report and Accounts 2019

181

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

35. Risks arising from financial instruments continued

c) Liquidity risk continued

(iii) Cash flows from derivative financial instruments
The following tables show the estimated cash flows that will arise from the Group’s 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.

2019
Within 1 year
1 – 2 years
2 – 5 years
5 – 10 years
10 – 15 years
15 – 20 years

2018
Within 1 year
1 – 2 years
2 – 5 years
5 – 10 years
10 – 15 years
15 – 20 years

Derivative liabilities

Interest rate
swaps
£m
(28.6)
(15.6)
(44.9)
(31.8)
(7.5)
–
(128.4)

Inflation
swaps
£m
–
–
(0.3)
(1.7)
(2.5)
10.4
5.9

Energy
swaps
£m
–
–
(0.4)
–
–
–
(0.4)

Interest rate
swaps
£m
16.7
0.3
0.6
0.4
(0.1)
–
17.9

Derivative liabilities

Interest rate
swaps
£m
(14.9)
(14.3)
(47.5)
(35.8)
(13.0)
–
(125.5)

Inflation
swaps
£m
–
–
0.2
0.8
1.6
(6.7)
(4.1)

Energy
swaps
£m
–
–
(0.8)
–
–
–
(0.8)

Interest rate
swaps
£m
5.1
1.7
3.5
3.9
–
–
14.2

Derivative assets
Cross currency swaps
Cash
payments
£m
(3.2)
(3.2)
(9.7)
(144.1)
(8.6)
–
(168.8)

Cash
receipts
£m
6.2
6.2
18.3
164.7
16.9
–
212.3

Derivative assets
Cross currency swaps
Cash
payments
£m
(0.2)
(0.3)
(1.1)
(13.0)
(8.8)
–
(23.4)

Cash
receipts
£m
1.1
1.1
3.4
23.3
17.5
–
46.4

Energy
swaps
£m
0.1
0.6
4.7
–
–
–
5.4

Energy
swaps
£m
0.2
–
0.1
–
–
–
0.3

Total
£m
(8.8)
(11.7)
(31.7)
(12.5)
(1.8)
10.4
(56.1)

Total
£m
(8.7)
(11.8)
(42.2)
(20.8)
(2.7)
(6.7)
(92.9)

d) Inflation risk
The Group’s principal operating subsidiary, Severn Trent Water Limited, operates under a regulatory environment where its prices
are linked to inflation measured by RPI. Its operating profits and cash flows are therefore exposed to changes in RPI. In order
to mitigate and partially offset this risk, Severn Trent Water has raised debt which pays interest at a fixed coupon based on a
principal amount that is adjusted for the change in RPI during the life of the debt instrument (‘index-linked debt’). The amount of
index-linked debt at the balance sheet date is shown in section a) (i) interest rate risk, and the estimated future cash flows relating
to this debt are shown in section c) (ii) cash flows from non-derivative financial instruments.

Ofwat has announced its plans to move towards an economic regulatory model linked to inflation measured on the CPIH index
over a period of time. In anticipation of this the Group has entered into CPI/RPI swaps with a notional value of £250 million
(2018: £150 million) in order to mitigate the risk of divergence between inflation measured by CPIH and that measured by RPI.

Inflation rate sensitivity analysis
The finance cost of the Group’s index-linked debt instruments varies with changes in RPI rather than interest rates. The sensitivity
at 31 March of the Group’s profit and equity to changes in RPI is set out in the following table. This analysis relates to financial
instruments only and excludes any RPI impact on Severn Trent Water’s revenues and Regulatory Capital Value, or accounting for
defined benefit pension schemes.

Profit or loss
Equity

+1.0%
£m
(10.6)
(10.6)

2019
-1.0%
£m
10.6
10.6

+1.0%
£m
(11.7)
(11.7)

2018
-1.0%
£m
11.7
11.7

182

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

36. 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 IFRS 9 are met.

a) Fair value hedges

(i) Cross currency swaps
The Group raises debt denominated in currencies other than sterling. 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. Where the terms of the receivable leg of the swap closely match the terms of the
underlying debt, 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:

Euro
US dollar
Yen

b) Cash flow hedges

Notional principal amount
2018
£m
11.4
–
8.5
19.9

2019
£m
11.4
23.2
8.5
43.1

2019
£m
10.1
0.2
8.8
19.1

Fair value
2018
£m
10.4
–
8.3
18.7

(i) Interest rate swaps
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. Where the hedge is expected to be
highly effective these interest rate swaps are accounted for as cash flow hedges.

Details of interest rate swaps that have been accounted for as cash flow hedges are summarised below:

Period to maturity
5 – 10 years
10 – 20 years

Average contract fixed
interest rate
2018
%
2.63
1.83
2.08

2019
%
2.63
1.83
2.08

Notional principal amount
2018
£m
135.2
298.0
433.2

2019
£m
135.2
298.0
433.2

2019
£m
(10.9)
(14.8)
(25.7)

Fair value
2018
£m
(8.6)
(5.0)
(13.6)

Severn Trent Plc Annual Report and Accounts 2019

183

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

36. Hedge accounting continued

b) Cash flow hedges continued

(ii) Energy swaps
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 2025.

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
5 – 10 years

37. Share based payment

Average contract price
2018
2019
£/MWh
£/MWh
47.6
48.6
48.6
44.7
40.5
43.7
47.7
–
41.3
44.2

Notional contracted amount
2018
MWh
43,680
21,955
547,460
–

2019
MWh
21,955
372,240
788,280
43,680
1,226,155

613,095

2019
£m
0.1
2.0
2.7
0.1
4.9

Fair value
2018
£m
0.2
–
(0.7)
–
(0.5)

The Group operates a number of share based remuneration schemes for employees. During the year, the Group recognised total
expenses of £8.1 million (2017/18: £6.9 million) related to equity settled share based payment transactions.

The weighted average share price during the year was £19.27 (2017/18: £21.25).

At 31 March 2019, there were no options exercisable (2018: none) under any of the share based remuneration schemes.

a) Long Term Incentive Plan
Under the Long Term Incentive Plan (‘LTIP’), 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.

(i) Awards made under the LTIP
The 2015, 2016, 2017 and 2018 LTIP awards are subject to Severn Trent Water’s achievement of Return on Regulated Equity in
excess of the level included in the Severn Trent Water AMP6 business plan over a three year vesting period. It has been assumed
that performance against the LTIP non-market conditions will be 100% (2018: 100%).

(ii) Awards outstanding
Details of changes in the number of awards outstanding during the year are set out below:

Opening at 1 April 2017
Granted during the year
Vested during the year
Lapsed during the year
Outstanding at 1 April 2018
Granted during the year
Vested during the year
Lapsed during the year
Outstanding at 31 March 2019

Details of LTIP awards outstanding at 31 March were as follows:

Date of grant
July 2015
July 2016
July 2017
July 2018

Number of awards
517,474
203,035
(139,829)
(31,906)
548,774
272,057
(159,463)
(35,945)
625,423

Normal date of
vesting
2018
2019
2020
2021

Number of awards

2019

–
175,543
181,070
268,810
625,423

2018
160,028
188,131
200,615

548,774

Details of the basis of the LTIP scheme are set out in the Directors’ remuneration report on pages 97 to 122.

184

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

37. Share based payment 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
Details of changes in the number of options outstanding during the year are set out below:

Outstanding at 1 April 2017
Granted during the year
Forfeited during the year
Cancelled during the year
Exercised during the year
Lapsed during the year
Outstanding at 1 April 2018
Granted during the year
Forfeited during the year
Cancelled during the year
Exercised during the year
Lapsed during the year
Outstanding at 31 March 2019

Sharesave options outstanding at 31 March were as follows:

Date of grant
January 2013
January 2014
January 2015
January 2016
January 2017
January 2018
January 2019

Number of
share options
3,106,607
1,087,376
(46,715)
(134,768)
(428,702)
(8,867)
3,574,931
1,331,044
(58,285)
(405,861)
(721,312)
(6,000)
3,714,517

Weighted
average
exercise price
1,572p
1,652p
1,636p
1,665p
1,306p
1,367p
1,625p
1,474p
1,663p
1,654p
1,532p
1,575p
1,585p

Number of awards

2019
–
144,212
227,212
556,447
662,545
804,957
1,319,144
3,714,517

2018
110,447
151,528
846,002
621,971
781,782
1,063,201
–
3,574,931

Normal date
of exercise
2018
2017 or 2019
2018 or 2020
2019 or 2021
2020 or 2022
2021 or 2023
2022 or 2024

Option price
1,241p
1,331p
1,584p
1,724p
1,663p
1,652p
1,474p

c) Fair value calculations
The fair values of the share awards made and share options granted during the year were calculated using the Black-Scholes
method. The principal assumptions and data are set out below:

Share price at grant date (pence)
Option life (years)
Vesting period (years)
Expected volatility (%)
Expected dividend yield (%)
Risk free rate (%)
Fair value per share (pence)

LTIP

1,884
3
3
18.2
4.0
n/a
1,866

3 year scheme
1,849
3.5
3
18.2
4.0
0.6
303

2019
SAYE
5 year scheme
1,849
5.5
5
18.2
4.0
0.8
284

LTIP

2,341
3
3
18.2
4.1
n/a
2,328

3 year scheme
2,138
3.5
3
18.2
4.1
0.5
375

2018
SAYE
5 year scheme
2,138
5.5
5
18.2
4.1
0.8
351

Expected volatility is measured over the three years prior to the date of grant of the awards or share options. Volatility has been
calculated based on historical share price movements.

The risk free rate is derived from yields at the grant date of gilts of similar duration to the awards or share options.

The dividend yield is calculated using the expected dividend for the year divided by the share price at the date of grant.

Severn Trent Plc Annual Report and Accounts 2019

185

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

38. Acquisitions

On 30 November 2018, Severn Trent Green Power Limited acquired 100% of the issued share capital of Agrivert Holdings Limited
for the total consideration of £61.3 million and the assumption of £59.7 million of existing debt.

Agrivert’s UK operations have been added to Severn Trent Green Power’s existing business and will complement our two
operating food waste anaerobic digestion plants at Coleshill and Roundhill and one under construction in Derby. The acquisition
has added 105 GWh of energy generation per annum, increasing the Group’s energy generating capacity by around 30%.

The acquisition has been accounted for using the acquisition method. Goodwill of £28.7 million has been capitalised attributable to
the anticipated future opportunities and outperformance arising as a result of the acquisition.

No goodwill related to this acquisition is expected to be deductible for tax purposes.

The residual excess over the net assets acquired has been recognised as goodwill.

Provisional fair values on acquisition
Intangible assets
Property, plant and equipment
Inventory
Trade and other receivables
Cash and cash equivalents
Borrowings
Trade and other payables
Provisions for liabilities
Deferred tax
Net assets acquired
Goodwill
Total consideration
Satisfied by:
Cash
Deferred consideration
Contingent consideration

Net cash flows arising on acquisition:
Cash consideration
Cash and cash equivalents acquired

Agrivert Group Limited for the period since acquisition to 31 March 2019:
Revenue
Profit before tax
Severn Trent Group for the year ended 31 March 2019 if acquisition happened on 1 April 2018:
Revenue
Profit before tax

£m

31.5
69.4
0.6
9.4
3.3
(63.0)
(4.9)
(0.5)
(13.2)
32.6
28.7
61.3

54.2
4.1
3.0
61.3

(54.2)
3.3
(50.9)

9.2
0.9

1,793.7
385.7

As outlined by IFRS 3, management has until the earliest of the date at which all information required is received or one year from
the acquisition date in order to satisfy the measurement period criteria. The fair values are provisional.

Acquisition-related costs amounting to £3.6 million were recognised as an expense in the income statement. No other acquisition
costs were recognised.

Contingent consideration is payable if the vendor obtains an extension to a lease agreement relating to one of the acquired Group’s
operating sites within two years of the acquisition date. The range of amounts payable is nil to £3 million.

See note 16 for the reconciliation of goodwill recognised for the Group.

186

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

39. Discontinued operations

Operating Services US
The disposal of the Group’s US business (Operating Services, US), which formed part of the Business Services segment, to US
investors PPC Enterprises LLC and Alston Capital Partners LLC, was completed on 30 June 2017.

The results of discontinued operations are disclosed separately in the income statement and comprise:

Turnover
Total operating costs
Loss before interest and tax
Net finance income
Loss before tax
Attributable tax expense
Gain on disposal of discontinued operations
Profit for the period attributable to owners of the Company

Basic and diluted earnings per share from discontinued operations are as follows:

Basic earnings per share
Diluted earnings per share

Profit
attributable to
owners of the
Company
£m
–
–

Weighted
average
number of
shares
m
–
–

2019

Per share
amount
pence
–
–

Net cash flows arising from the discontinued operations in the year were:

2019
£m
–
–
–
–
–
–
–
–

2018
£m
42.1
(42.2)
(0.1)
–
(0.1)
0.3
13.0
13.2

2018

Profit
attributable to
owners of the
Company
£m
13.2
13.2

Weighted
average
number of
shares
£m
235.3
236.1

Per share
amount
pence
5.6
5.6

Net cash flows attributable to:

operating activities
investing activities
financing activities

The net gain on disposals is calculated as follows:

Consideration
Net assets attributable to owners of the Company

Tax on gain on disposal
Disposal costs and provisions on disposal
Foreign exchange gain recycled from reserves
Net gain on disposal

2019
£m

–
–
–
–

2018
£m

1.9
(0.6)
–
1.3

2018
Operating
Services US
£m
47.8
(45.5)
2.3
(0.7)
(18.4)
29.8
13.0

The net assets of the business at the date of disposal, all of which were attributable to the owners of the Company, were:

Goodwill
Other intangible assets
Property, plant and equipment
Inventory
Trade and other receivables
Cash and bank balances
Trade and other payables
Net assets attributable to owners of the Company

Severn Trent Plc Annual Report and Accounts 2019

2018
Operating
Services US
£m
14.4
2.9
9.4
0.6
28.2
9.9
(19.9)
45.5

187

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

39. Discontinued operations continued

The net cash flows arising from disposals were:

Consideration received in cash and cash equivalents
Disposal costs paid in cash and cash equivalents
Cash and bank balances disposed of

40. Cash flow statement

a) Reconciliation of operating profit to operating cash flows

Profit before interest and tax from continuing operations
Profit before interest and tax from discontinued operations
Profit before interest and tax
Depreciation of property, plant and equipment
Amortisation of intangible assets
Pension service cost
Defined benefit pension scheme administration costs
Defined benefit pension scheme contributions
Share based payment charge
Loss/(profit) on sale of property, plant and equipment and intangible assets
Exceptional depreciation – property, plant and equipment
Profit on disposal of businesses
Deferred income credit to the income statement
Provisions charged to the income statement
Utilisation of provisions for liabilities
Operating cash flows before movements in working capital
Increase in inventory
Increase in amounts receivable
Increase in amounts payable
Cash generated from operations
Tax received
Tax paid
Net cash generated from operating activities

2018
£m
39.3
(4.3)
(9.9)
25.1

2018
(restated)
£m
527.2
13.6
540.8
308.8
20.8
(7.8)
1.8
(35.2)
6.9
(7.3)
16.8
(13.7)
(14.3)
13.8
(5.4)
826.0
(2.9)
(58.4)
8.6
773.3
8.0
(14.5)
766.8

2019

£m
563.3
–
563.3
315.4
30.5
9.8
2.3
(34.9)
8.1
0.6
–
–
(14.7)
12.2
(12.8)
879.8
(1.7)
(60.0)
8.2
826.3
–
(21.3)
805.0

b) Non-cash transactions
No additions to property, plant and equipment during the year were financed by new finance leases (2018: nil). Assets transferred
from developers at no cost were recognised at their fair value of £42.1 million (2018: £35.3 million).

c) Reconciliation of movement in cash and cash equivalents to movement in net debt

As at 1 April 2018
Cash flow
Fair value adjustments
RPI uplift on index-linked debt
Debt acquired on acquisition
Foreign exchange
Other non-cash movements
As at 31 March 2019

Net cash
and cash
equivalents
£m
38.5
(2.2)
–
–
3.3
–
–
39.6

Bank
loans
£m
(1,217.4)
163.5
–
(2.9)
(62.4)
–
(0.9)
(1,120.1)

Other
loans
£m
(4,223.9)
(551.8)
1.6
(36.8)
–
(8.1)
(1.5)
(4,820.5)

Finance
leases
£m
(113.9)
2.3
–
–
(0.6)
–
–
(112.2)

Cross
currency
swaps
£m
24.5
–
12.6
–
–
–
–
37.1

Loans due
from joint
ventures
£m
135.6
6.0
–
–
–
–
0.4
142.0

Net
debt
£m
(5,356.6)
(382.2)
14.2
(39.7)
(59.7)
(8.1)
(2.0)
(5,834.1)

Liabilities from financing activities comprise bank loans, other loans and finance leases.

188

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

41. Contingent liabilities

Bonds and guarantees
Group undertakings have entered into bonds and guarantees in the normal course of business. No liability (2018: nil) is expected
to arise in respect of either bonds or guarantees.

42. Financial and other commitments

a) Investment expenditure commitments

Contracted for but not authorised in the financial statements

2019
£m
359.2

2018
£m
395.0

In addition to these contractual commitments, Severn Trent Water Limited has longer term expenditure plans which include
investments to achieve improvements in performance mandated by Ofwat and to provide for growth in demand for water and
waste water services.

b) Leasing commitments
At the balance sheet date the Group had outstanding operating commitments for future minimum operating lease payments
under non-cancellable operating leases, which fall due as follows:

Within 1 year
1 – 5 years
After more than 5 years

2019
£m
2.8
4.2
10.5
17.5

2018
£m
1.1
2.4
4.8
8.3

Operating lease payments represent rentals by the Group for certain of its office property, plant and equipment.

43. Post balance sheet events

Following the year end the Board of Directors have proposed a final dividend of 56.02 pence per share. Further details of this are
shown in note 14.

44. 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. Trading transactions between the Group and its joint venture, Water Plus, are disclosed below.

Sale of services
Net interest income

Outstanding balances between the Group and the joint venture as at 31 March were as follows:

Trade and other receivables due from related parties
Loans receivable from joint ventures

2019
£m
335.0
3.8
338.8

2019
£m
2.3
142.0
144.3

Water Plus
2018
£m
354.9
2.4
357.3

Water Plus
2018
£m
44.9
135.6
180.5

The retirement benefit schemes operated by the Group are considered to be related parties. Details of transactions and balances
with the retirement benefit schemes are disclosed in note 28.

Severn Trent Plc Annual Report and Accounts 2019

189

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

44. Related party transactions continued

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 117 to 122.

Short-term employee benefits
Share based payment

45. Alternative performance measures

2019
£m
6.5
2.9
9.4

2018
£m
6.4
3.5
9.9

Financial measures or metrics used in this report that are not defined by IFRS are alternative performance measures (’APMs’).
The Group uses such measures for performance analysis because they provide additional useful information on the performance
and position of the Group. Since the Group defines its own APMs, these might not be directly comparable with other companies’
APMs. These measures are not intended to be a substitute for, or superior to, IFRS measurements.

a) 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.

b) Underlying PBIT
Underlying profit before interest and tax is profit before interest and tax excluding exceptional items as recorded in the income
statement and amortisation of intangible assets recognised on acquisition of subsidiaries. This provides a measure of operating
performance excluding distortions caused by exceptional items and reflecting the operational performance of the acquired
subsidiaries. Following the acquisition of Agrivert this APM was updated to include adjustment of amortisation on acquired
intangible assets. The calculation of this APM is shown on the face of the income statement and in note 5 for reportable segments.

c) Underlying earnings per share
Underlying earnings per share figures are presented for continuing operations. These exclude the effects of exceptional items,
amortisation of acquired intangible assets, net gains/losses on financial instruments, current tax on exceptional items and on
net gains/losses on financial instruments and deferred tax. The Directors consider that the underlying figures provide a useful
additional indicator of performance and remove non-performance related distortions. See note 15.

d) Net debt
Net debt comprises borrowings including remeasurements for changes in fair value of amounts in fair value hedging
relationships, cross currency swaps that are used to fix the sterling liability of foreign currency borrowings (whether hedge
accounted or not), net cash and cash equivalents, and loans to joint ventures. See note 40.

e) Effective interest rate
The effective interest rate is calculated as net finance costs, excluding net finance costs from pensions, plus capitalised finance
costs divided by the monthly average net debt during the year.

(net finance costs – net finance costs from pensions + capitalised finance costs)
(monthly average net debt)

Net finance costs
Net finance costs from pensions
Capitalised interest

Average net debt

Effective interest rate

This APM is used as it shows the average interest rate that is attributable to the net debt of the business.

2019
£m
194.2
(13.8)
33.2
213.6

2018
£m
219.5
(15.5)
26.2
230.2

5,547.7

5,134.4

3.9%

4.5%

190

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

45. Alternative performance measures continued

f) Effective cash cost of interest
The effective cash cost of interest is calculated on the same basis as the effective interest rate except that it excludes finance
costs that are not paid in cash but are accreted to the carrying value of the debt (principally RPI adjustments on index-linked debt).

(net finance costs – net finance costs from pensions – RPI interest + capitalised finance costs)
(monthly average net debt)

Net finance costs
Net finance costs from pensions
RPI interest
Capitalised interest

Average net debt

Effective cash cost of interest

2019
£m
194.2
(13.8)
(38.0)
33.2
175.6

2018
£m
219.5
(15.5)
(54.1)
26.2
176.1

5,547.7

5,134.4

3.2%

3.4%

This is used as it shows the average cash interest rate based on the net debt of the business.

g) PBIT interest cover
The ratio of items underlying PBIT (see (b) above) to net finance costs excluding net finance costs from pensions.

underlying PBIT
(net finance costs – net finance costs from pensions)

Underlying PBIT

Net finance costs
Net finance costs from pensions
Net finance costs excluding finance costs from pensions

PBIT interest cover ratio

2019

£m
573.6

194.2
(13.8)
180.4

2018
(restated)
£m
539.8

219.5
(15.5)
204.0

3.2

2.6

This is used to show how the underlying PBIT of the business covers the financing costs associated only with net debt on a
consistent basis.

Severn Trent Plc Annual Report and Accounts 2019

191

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

45. Alternative performance measures continued

h) EBITDA and EBITDA interest cover
The ratio of profit from continuing operations before interest, tax, exceptional items, depreciation and amortisation to net finance
costs excluding net finance costs from pensions.

(underlying PBIT + depreciation + amortisation)
(net finance costs – net finance costs from pensions)

Underlying PBIT
Depreciation
Amortisation (excluding amortisation of intangible assets recognised on acquisition of subsidiaries)
EBITDA

Net finance costs
Net finance costs from pensions
Net finance costs excluding finance costs from pensions

EBITDA interest cover ratio

2019
£m
573.6
315.4
29.8
918.8

194.2
(13.8)
180.4

2018
(restated)
£m
539.8
308.2
20.5
868.5

219.5
(15.5)
204.0

5.1

4.3

This is used to show how the EBITDA of the business covers the financing costs associated only with net debt on a
consistent basis.

i) Underlying effective current tax rate
Current tax charge for the year on continuing operations, excluding prior year charges, current tax on exceptional items and
on financial instruments, divided by profit from continuing operations before tax, net gains/losses on financial instruments,
exceptional items, and share of net profit of joint ventures accounted for using the equity method.

(current year current tax charge in the income statement – tax on exceptional items – tax on financial instruments)
(PBT – share of net profit of JVs – exceptional items – net losses on financial instruments)

Profit before tax
Adjustments
Share of net loss/(profit) of joint ventures
Exceptional items
Net (gains)/losses on financial instruments

Underlying effective current tax rate

2019

Current tax
theron
£m
(41.2)

–
–
(2.6)
(43.8)
11.6%

£m
384.7

0.4
9.6
(16.0)
378.7

2018
(restated)
Current tax
theron
£m
(36.8)

–
(0.7)
(3.3)
(40.8)
12.7%

£m
301.2

(0.2)
12.6
6.7
320.3

This APM is used to remove distortions in the tax charge and create a metric consistent with the calculation of underlying
earnings per share in note 15. Share of net profit of joint ventures is excluded from the calculation because this is included after
tax and the tax on joint venture profits is therefore not included in the current tax charge.

192

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

46. Subsidiary undertakings

Details of all subsidiary undertakings as at 31 March 2019 are given below. Details of the joint venture are set out in note 19.
All subsidiary undertakings have been included in the consolidation.

Owned directly by Severn Trent Plc
Severn Trent Investment Holdings Limited

Country of operation
and incorporation
United Kingdom

Percentage of
share capital held
100%

Class of share
capital held
Ordinary

The following subsidiary undertakings all operate and are incorporated in the United Kingdom. The percentage of share capital
held is 100% and the class of share capital held is ordinary.

All subsidiary undertakings
Aqua Deva Limited
Charles Haswell and Partners Limited
Chester Water Limited
Debeo Debt Recovery Limited
Dee Valley Group Limited
Dee Valley Limited
Dee Valley Services Limited
Dee Valley Water (Holdings) Limited
East Worcester Water Limited
Etwall Land Limited
Gunthorpe Fields Limited
Hafren Dyfrdwy Cyfyngedig
Midlands Land Portfolio Limited
North Wales Gas Limited
Northern Gas Supplies Limited
Severn Trent Corporate Holdings Limited
Severn Trent Data Portal Limited
Severn Trent Draycote Limited
Severn Trent Finance Holdings Limited
Severn Trent Finance Limited
Severn Trent Financing and Investments Limited
Severn Trent General Partnership Limited
Severn Trent Green Power (Ardley) Limited
Severn Trent Green Power (Bridgend) Limited
Severn Trent Green Power (Cassington) Limited
Severn Trent Green Power (CW) Limited
Severn Trent Green Power (Hertfordshire) Limited
Severn Trent Green Power (North London) Limited
Severn Trent Green Power (RBWM) Limited
Severn Trent Green Power (Wallingford) Limited
Severn Trent Green Power (West London) Limited
Severn Trent Green Power Biogas Limited
Severn Trent (W&S) Limited

Severn Trent Green Power Composting Limited
Severn Trent Green Power Group Limited
Severn Trent Green Power Holdings Limited
Severn Trent Green Power Limited
Severn Trent Holdings Limited
Severn Trent LCP Limited
Severn Trent Leasing Limited
Severn Trent Metering Services Limited
Severn Trent MIS Trustees Limited
Severn Trent Overseas Holdings Limited
Severn Trent Pension Scheme Trustees Limited
Severn Trent PIF Trustees Limited
Severn Trent Power Generation Limited
Severn Trent Property Solutions Limited
Severn Trent Reservoirs Limited
Severn Trent Services Defence Limited
Severn Trent Services (Water and Sewerage) Limited
Severn Trent Services Defence Holdings Limited
Severn Trent Services Holdings Limited
Severn Trent Services International (Overseas Holdings) Limited
Severn Trent Services International Limited
Severn Trent Services Operations UK Limited
Severn Trent Services Purification Limited
Severn Trent Services UK Limited
Severn Trent SSPS Trustees Limited
Severn Trent Systems Limited
Severn Trent Trimpley Limited
Severn Trent Utilities Finance Plc
Severn Trent Utility Services Limited
Severn Trent Water Limited
Severn Trent Wind Power Limited
Wrexham Water Limited
Severn Trent Retail and Utility Services Limited

All subsidiary undertakings
Derwent Insurance Limited
Energy Supplies UK Limited
Lyra Insurance Guernsey Limited
Severn Trent Africa (Pty) Ltd
Severn Trent Carsington Limited
Severn Trent Response Limited

Country of operation
and incorporation
Gibraltar
United Kingdom
Guernsey
South Africa
United Kingdom
Ireland

Percentage of
share capital held
100%
100%
100%
100%
100%
60%

Class of share
capital held
Ordinary
A and B Ordinary
Ordinary
Ordinary
A and B Ordinary
Ordinary

Severn Trent Plc Annual Report and Accounts 2019

193

Group financial statements

Notes to Group financial statements continued
For the year ended 31 March 2019

46. Subsidiary undertakings continued

Unless stated below, the registered office of the aforementioned entities is Severn Trent Centre, 2 St John’s Street, Coventry,
CV1 2LZ, United Kingdom.

Company
Dee Valley Limited
Derwent Insurance Limited
Hafren Dyfrdwy Cyfyngedig
Lyra Insurance Guernsey Limited
Severn Trent Africa (Pty) Ltd
Severn Trent General Partnership Limited
Severn Trent Green Power (Ardley) Limited
Severn Trent Green Power (Bridgend) Limited
Severn Trent Green Power (Cassington) Limited
Severn Trent Green Power (CW) Limited
Severn Trent Green Power (Hertfordshire) Limited
Severn Trent Green Power (North London) Limited
Severn Trent Green Power (RBWM) Limited
Severn Trent Green Power (Wallingford) Limited
Severn Trent Green Power (West London) Limited
Severn Trent Green Power Biogas Limited
Severn Trent Green Power Composting Limited
Severn Trent Green Power Group Limited
Severn Trent Green Power Holdings Limited
Severn Trent Response Limited

Registered office
Packsaddle, Wrexham Road, Rhostyllen, Wrexham, LL14 4EH
6A Queensway, PO Box 64, Gibraltar
Packsaddle, Wrexham Road, Rhostyllen, Wrexham, LL14 4EH
St Martin's House, Le Bordage, St Peter Port, GY1 4AU, Guernsey
2 Elgin Road, Sunninghill, Johannesburg, South Africa
50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
6th Floor, 2 Grand Canal Square, Dublin 2, Ireland

Subsidiary audit exemptions
Severn Trent Plc has issued guarantees over the liabilities of the following companies at 31 March 2019 under section 479C of
Companies Act 2006 and these entities are exempt from the requirements of the Act relating to the audit of individual accounts by
virtue of section 479A of the Act.

Company Number
Company
2416605
Charles Haswell and Partners Limited
2888872
Chester Water Limited
4316684
Dee Valley Group Limited
2902525
Dee Valley Limited
4421854
Dee Valley Water (Holdings) Limited
2757948
East Worcester Water Limited
7559793
Etwall Land Limited
4240764
Gunthorpe Fields Limited
3995023
Severn Trent (W&S) Limited
7570384
Severn Trent Carsington Limited
4395566
Severn Trent Corporate Holdings Limited
8181048
Severn Trent Data Portal Limited
7681784
Severn Trent Draycote Limited
6044159
Severn Trent Finance Holdings Limited
6294618
Severn Trent Finance Limited
6312635
Severn Trent Financing and Investments Limited
SC416614
Severn Trent General Partnership Limited
5656363
Severn Trent Holdings Limited
7560050
Severn Trent Investment Holdings Limited
7943556
Severn Trent LCP Limited
6810163
Severn Trent Leasing Limited
2569703
Severn Trent Metering Services Limited
2455508
Severn Trent Overseas Holdings Limited
2651131
Severn Trent Power Generation Limited
3115315
Severn Trent Reservoirs Limited
2562471
Severn Trent Retail and Utility Services Limited
4395572
Severn Trent Services Holdings Limited
2387816
Severn Trent Services International Limited
Severn Trent Services International (Overseas Holdings) Limited 3125131
2409826
Severn Trent Services Purification Limited
8120387
Severn Trent Services UK Limited
2394552
Severn Trent Systems Limited
10690056
Severn Trent Trimpley Limited
4125386
Severn Trent Utility Services Limited

194

Severn Trent Plc Annual Report and Accounts 2019

Company statement of comprehensive income
For the year ended 31 March 2019

Profit for the year
Other comprehensive income/(loss)
Items that will not be reclassified to the income statement:

Net actuarial losses
Tax on net actuarial losses

Other comprehensive loss for the year
Total comprehensive income for the year

Strategic report
Governance
Group financial statements
Company financial statements
Other information

2019
£m
216.5

(0.1)
–
(0.1)
216.4

2018
£m
182.4

(9.1)
1.5
(7.6)
174.8

Severn Trent Plc Annual Report and Accounts 2019

195

Company financial statements

Company statement of changes in equity
For the year ended 31 March 2019

At 1 April 2017
Profit for the year
Net actuarial losses
Tax on net actuarial losses
Total comprehensive income for the year
Share options and LTIPs
– proceeds from shares issued
– value of employees’ services
Dividends paid
At 31 March 2018
Profit for the year
Net actuarial losses
Tax on net actuarial losses
Total comprehensive income for the year
Share options and LTIPs
– proceeds from shares issued
– value of employees’ services
Dividends paid
At 31 March 2019

Share
capital
£m
234.7
–
–
–
–

0.4
–
–
235.1
–
–
–
–

0.8
–
–
235.9

Share
premium
£m
112.5
–
–
–
–

Other
reserves
£m
160.7
–
–
–
–

5.2
–
–
117.7
–
–
–
–

10.3
–
–
128.0

–
–
–
160.7
–
–
–
–

–
–
–
160.7

Retained
earnings
£m
2,973.7
182.4
(9.1)
1.5
174.8

–
6.9
(197.0)
2,958.4
216.5
(0.1)
–
216.4

–
7.2
(211.9)
2,970.1

Total
£m
3,481.6
182.4
(9.1)
1.5
174.8

5.6
6.9
(197.0)
3,471.9
216.5
(0.1)
–
216.4

11.1
7.2
(211.9)
3,494.7

Included in retained earnings are profits of £1,221.2 million that arose from Group restructuring arrangements in previous years
and are therefore not distributable.

196

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

Note

2019
£m

2018
£m

2
3
4
5
6

7
8
9

7
8

10
11
12

0.1
0.5
3,337.9
1.6
659.8
3,999.9

23.8
25.2
1.9
50.9

(4.5)
(147.1)
(3.6)
(155.2)
(104.3)
3,895.6

(88.3)
(298.9)
(8.6)
(5.1)
(400.9)
3,494.7

235.9
128.0
160.7
2,970.1
3,494.7

0.2
0.2
3,330.0
1.5
527.6
3,859.5

44.3
15.9
–
60.2

(17.2)
(137.0)
(6.0)
(160.2)
(100.0)
3,759.5

(85.4)
(189.0)
(8.7)
(4.5)
(287.6)
3,471.9

235.1
117.7
160.7
2,958.4
3,471.9

Company balance sheet
For the year ended 31 March 2019

Non-current assets
Intangible fixed assets
Tangible fixed assets
Investments in subsidiaries
Deferred tax asset
Trade and other receivables

Current assets
Trade and other receivables
Current tax receivable
Cash and cash equivalents

Current liabilities
Borrowings
Trade and other payables
Provisions

Net current liabilities
Total assets less current liabilities
Non-current liabilities
Borrowings
Trade and other payables
Retirement benefit obligations
Provisions

Net assets
Capital and reserves
Called up share capital
Share premium account
Other reserves
Retained earnings
Total capital and reserves

The profit for the year is £216.5 million (2018: £182.4 million).

Signed on behalf of the Board who approved the accounts on 20 May 2019.

Andrew Duff
Chairman

James Bowling
Chief Financial Officer

Company number: 02366619

Severn Trent Plc Annual Report and Accounts 2019

197

Company financial statements

Notes to Company financial statements
For the year ended 31 March 2019

1. Employee numbers

The average number of employees during the year was 11 (2018: 9).

2. Intangible fixed assets

Cost
At 1 April 2018
Disposals
As at 31 March 2019
Amortisation
At 1 April 2018
Amortisation for the year
Disposals
At 31 March 2019
Net book value
At 31 March 2019
At 31 March 2018

3. Tangible fixed assets

Cost
At 1 April 2018
Additions
Disposals
As at 31 March 2019
Depreciation
At 1 April 2018
Disposals
At 31 March 2019
Net book value
At 31 March 2019
At 31 March 2018

4. Investments in subsidiaries

As at 1 April 2018
Additions
Impairment
As at 31 March 2019

Purchased
software
£m

1.1
(0.9)
0.2

(0.9)
–
0.8
(0.1)

0.1
0.2

Total
£m

0.7
0.5
(0.7)
0.5

(0.5)
0.5
–

0.5
0.2

£m
3,330.0
8.1
(0.2)
3,337.9

Land and
buildings
£m

Office fixtures
and equipment
£m

Assets under
construction
£m

0.1
–
(0.1)
–

–
–
–

–
0.1

0.6
–
(0.6)
–

(0.5)
0.5
–

–
0.1

–
0.5
–
0.5

–
–
–

0.5
–

Details of principal subsidiaries of the Company are given in note 46 to the Group financial statements.

198

Severn Trent Plc Annual Report and Accounts 2019

Accelerated
tax
depreciation
£m
0.1
(0.1)
–
–
0.1
0.1

Retirement
benefit
obligations
£m
–
–
1.5
1.5
–
1.5

Fair value
of financial
instruments
£m
0.1
(0.1)
–
–
–
–

5. Deferred tax asset

At 1 April 2017
(Charge)/credit to income
Credit to equity
At 1 April 2018
Credit to income
At 31 March 2019

6. Trade and other receivables

Current assets
Other amounts receivable
Prepayments
Amounts owed by group undertakings

Non-current assets
Other amounts receivable
Loan receivable
Amounts owed by group undertakings under loan agreements

7. Borrowings

Current liabilities
Bank overdraft
Non-current liabilities
Other loans

Strategic report
Governance
Group financial statements
Company financial statements
Other information

Other
£m
(0.1)
0.1
–
–
–
–

2019
£m

6.5
0.4
16.9
23.8

–
32.4
627.4
659.8
683.6

2019
£m

4.5

88.3
92.8

Total
£m
0.1
(0.1)
1.5
1.5
0.1
1.6

2018
£m

4.4
0.5
39.4
44.3

1.6
26.4
499.6
527.6
571.9

2018
£m

17.2

85.4
102.6

Non-current borrowings comprise the Company’s RPI linked retail bond issued in July 2012. The bond carries a coupon of 1.3% on
the principal amount which is uplifted by RPI. The bond is repayable in July 2022.

At the balance sheet date the Company had £100 million (2018: £100 million) of undrawn borrowing facilities.

8. Trade and other payables

Current liabilities
Trade payables
Social security and other taxes
Other payables
Accruals
Amounts due to group undertakings

Non-current liabilities
Amounts due to group undertakings

Severn Trent Plc Annual Report and Accounts 2019

2019
£m

2018
£m

0.3
0.1
4.0
3.4
139.3
147.1

298.9
446.0

0.5
0.5
2.8
4.0
129.2
137.0

189.0
326.0

199

Company financial statements

Notes to Company financial statements continued
For the year ended 31 March 2019

9. Provisions

At 1 April 2018
Charged to income statement
Utilisation of provision
At 31 March 2019

Included in:
Current liabilities
Non-current liabilities

Insurance
£m
5.6
–
(0.6)
5.0

Other
£m
4.9
0.1
(1.3)
3.7

2019
£m

3.6
5.1
8.7

Total
£m
10.5
0.1
(1.9)
8.7

2018
£m

6.0
4.5
10.5

The claim outflows associated with insurance provisions are estimated to arise over a period of up to five years from the balance
sheet date.

Other provisions include provisions for dilapidations and commercial disputes. The associated outflows are estimated to arise
over a period up to five years from the balance sheet date.

10. Share capital

Total issued and fully paid share capital
240,943,929 ordinary shares of 97 17/19p (2018: 240,222,617)

At 31 March 2019, 3,774,921 treasury shares were held (2018: 3,948,599).

Changes in share capital were as follows:

Ordinary shares of 9717/19p
At 1 April 2017
Shares issued under the Employee Sharesave Scheme
At 1 April 2018
Shares issued under the Employee Sharesave Scheme
At 31 March 2019

11. Share premium

At 1 April
Share premium arising on issue of shares for Employee Sharesave Scheme
At 31 March

12. Other reserves

At 1 April 2017, 31 March 2018 and 2019

The capital redemption reserve arose on the redemption of B shares.

2019
£m

2018
£m

235.9

235.1

Number

£m

239,793,915
428,702
240,222,617
721,312
240,943,929

2019
£m
117.7
10.3
128.0

Hedging
reserve
£m
3.6

234.7
0.4
235.1
0.8
235.9

2018
£m
112.5
5.2
117.7

Total
£m
160.7

Capital
redemption
reserve
£m
157.1

The hedging reserve arises from gains or losses on interest rate swaps taken directly to equity under the hedge accounting
provisions of IFRS 9 and the transition rules of IFRS 1.

13. Share based payment

For details of employee share schemes and options granted over the shares of the Company, see note 37 of the Group financial
statements. Details of options exercised and awards vesting during the year and of the weighted average share price of the
Company during the year are also disclosed in that note.

200

Severn Trent Plc Annual Report and Accounts 2019

Strategic report
Governance
Group financial statements
Company financial statements
Other information

14. Pensions

Defined benefit schemes
The Group operates defined benefit pension schemes, of which some employees of the Company are members. There is no
contractual agreement for charging the net defined benefit cost of these schemes between the companies that participate in
the schemes. As a result, the net defined benefit cost of the scheme is recognised in the financial statements of the sponsoring
employer, Severn Trent Water Limited. The scheme closed to future accrual on 31 March 2015. The cost of contributions to the
Group schemes amount to £0.4 million (2018: £0.6 million). There were no amounts outstanding for contributions to the defined
benefit schemes (2018: nil).

The Company 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. This unfunded scheme is part of the Severn Trent Pension Scheme.

Information about the schemes as a whole is disclosed in note 28 to the Group financial statements.

15. Related party transactions

The retirement benefit schemes operated by the Group are considered to be related parties. Details of transactions and balances
with the retirement benefit schemes are disclosed in note 28.

The Company has given guarantees in favour of Water Plus Limited in respect of the joint venture’s liabilities to wholesalers in the
Open Water market and its loan from Severn Trent Water Limited. The guarantee in respect of liabilities to wholesalers is capped
at £58.1 million (2018: £42.5 million) and the guarantees for the Severn Trent Water loan is for the amount due.

16. 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. As at 31 March 2019, the Company had no contingent liabilities
(2018: nil).

17. Post balance sheet events

Following the year end the Board of Directors has proposed a final dividend of 56.02 pence per share.

18. Dividends

For details of the dividends paid in the years ended 31 March 2019 and 31 March 2018 see note 14 in the Group
financial statements.

Severn Trent Plc Annual Report and Accounts 2019

201

Other information

Five year summary

Continuing operations
Turnover
Profit before interest, tax and exceptional items
Net exceptional items before tax
Amortisation of acquired intangible assets
Net interest payable before gains/(losses) on financial
instruments and exceptional finance costs
Gains/(losses) on financial instruments
Results of associates and joint ventures
Profit on ordinary activities before taxation
Current tax on profit on ordinary activities
Deferred tax
Exceptional tax
Profit on ordinary activities after taxation
Results from discontinued operations
Profit for the year
Net assets employed
Fixed assets
Other net liabilities excluding net debt, retirement benefit
obligation, provisions and deferred tax
Derivative financial instruments²
Net retirement benefit obligation
Provisions for liabilities and deferred tax
Net assets held for sale

Financed by
Called up share capital
Reserves
Total shareholders’ funds
Non-controlling interests
Net debt³

Statistics
Earnings per share (continuing) – pence
Underlying earnings per share – pence
Dividends per share (excluding special dividend) – pence
Dividend cover (before exceptional items and deferred tax)
Gearing4 – %
Ordinary share price at 31 March – pence
Average number of employees
– Regulated Water and Waste Water
– Other

2019

£m
1,767.4
573.6
(9.6)
(0.7)

(194.2)
16.0
(0.4)
384.7
(31.8)
(37.6)
–
315.3
–
315.3

2018
(restated)¹
£m
1,696.4
539.8
(12.6)
–

(219.5)
(6.7)
0.2
301.2
(32.9)
(28.7)
–
239.6
13.2
252.8

2017

2016

2015

£m
1,638.0
520.1
16.6
–

(205.1)
(1.8)
(1.8)
328.0
(36.3)
(22.4)
52.2
321.5
21.1
342.6

£m
1,753.7
503.4
1.0
–

(209.3)
7.7
0.1
302.9
(51.3)
(13.7)
78.6
316.5
14.8
331.3

£m
1,801.3
540.3
(18.7)
–

(240.0)
(133.5)
0.1
148.2
(37.8)
5.1
–
115.5
4.7
120.2

9,337.7

8,660.1

8,315.7

7,810.8

7,620.0

(992.6)
(95.1)
(452.9)
(798.9)
–
6,998.2

235.9
928.2
1,164.1
–
5,834.1
6,998.2

133.4
145.8
93.4
1.6
83.3
1,976.0

5,680
900

(956.0)
(104.3)
(519.8)
(726.5)
–
6,353.5

235.1
761.8
996.9
–
5,356.6
6,353.5

101.8
120.5
86.6
1.4
84.4
1,844.0

5,660
605

(916.8)
(161.1)
(574.6)
(657.5)
–
6,005.7

234.7
688.6
923.3
–
5,082.4
6,005.7

136.8
115.7
81.5
1.4
84.6
2,382.0

5,273
596

(798.4)
(166.3)
(309.5)
(694.7)
–
5,841.9

234.3
783.1
1,017.4
1.1
4,823.4
5,841.9

133.5
102.1
80.7
1.3
82.6
2,173.0

5,236
2,122

(799.0)
(177.7)
(468.9)
(725.4)
72.6
5,521.6

233.7
521.9
755.6
13.4
4,752.6
5,521.6

48.3
107.2
84.9
1.3
86.1
2,059.0

5,532
1,910

1 Restated as set out in note 2 to the Group financial statements.

2 Excludes instruments hedging foreign currency debt.

3 Includes instruments hedging foreign currency debt.

4 Gearing has been calculated as net debt divided by the sum of equity and net debt.

202

Severn Trent Plc Annual Report and Accounts 2019

Information for shareholders

Strategic report
Governance
Group financial statements
Company financial statements
Other information

Severn Trent shareholder helpline

Electronic communications

The Company’s registrar is Equiniti. Equiniti’s main
responsibilities include maintaining the shareholder register
and making dividend payments.

By registering to receive shareholder documentation from
Severn Trent Plc electronically shareholders can benefit from
being able to:

If you have any queries relating to your Severn Trent Plc
shareholding you should contact Equiniti.

• view the Annual Report and Accounts on the day it

is published;

Registrar contact details:

• receive an email alert when shareholder documents

Online: www.shareview.co.uk from here you will be able
to securely email Equiniti with your query.

are available;

• cast their AGM vote electronically; and

Telephone: 0371 384 2967*

Overseas enquiries: +44 121 415 7044

Text phone: 0371 384 2255*

By post: Equiniti, Aspect House, Spencer Road, Lancing,
West Sussex, BN99 6DA

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.

• 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

Dividend payments

Bank mandates
Dividends can be paid automatically into your bank or building
society account.

The benefits of doing this are that 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 (‘DRIP’)
The DRIP 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 DRIP,
please request a dividend reinvestment plan mandate from
Equiniti Financial Services Limited.

Telephone: 0371 384 2268*

Telephone number from outside the UK: +44 121 415 7173

* Lines are open 8:30am to 5:30pm Monday to Friday (excluding public holidays in

England and Wales).

Severn Trent Plc Annual Report and Accounts 2019

203

Other information

Information for shareholders
Continued

Buying and selling shares in the UK

If you wish to buy or sell certificated Severn Trent Plc shares,
you may 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 can be
obtained from www.shareview.co.uk or 0345 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
Fraudsters use persuasive and high pressure tactics to lure
investors into scams. They may offer to sell shares that turn
out to be worthless or non-existent, or to buy shares at an
inflated price in return for an upfront payment. While high
profits are promised, if you buy or sell shares in this way you
will probably lose your money.

How to avoid share fraud:

• Think about getting independent financial and professional

advice before you hand over any money.

• Remember, if it sounds too good to be true, it probably is.

If you are approached by fraudsters please tell the FCA using
the share fraud reporting form at www.fca.org.uk/scams,
where you can find out more about investment scams.

You can also call the Freephone FCA Consumer helpline on
0800 111 6768.

If you have already paid money to share fraudsters you should
contact Action Fraud on 0300 123 2040.

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 0345 0700 705.

• Keep in mind that firms authorised by the Financial Conduct
Authority (‘FCA’) are unlikely to contact you out of the blue
with an offer to buy or sell shares.

• Do not get into a conversation, note the name of the person

and firm contacting you and then end the call.

• Check the Financial Services Register at www.fca.org.uk to
see if the person and firm contacting you is authorised by
the FCA.

American Depositary Receipts

Severn Trent has a sponsored Level 1 American Depositary
Receipt (‘ADR’) programme, for which The Bank of New York
Mellon acts as Depositary.

The Level 1 ADR programme 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 one Severn Trent Ordinary Share.

• Beware of fraudsters claiming to be from an authorised firm,

copying its website or giving you false contact details.

If you have any enquiries regarding Severn Trent ADRs please
contact The Bank of New York Mellon.

• Use the firm’s contact details listed on the Register if you

want to call it back.

By post: BNY Mellon Shareowners Services, PO Box 30170,
College Station, TX 77842-3170, US.

• Call the Freephone FCA Consumer helpline on 0800 111 6768
if the firm does not have contact details on the Register or
you are told they are out of date.

• Search the list of unauthorised firms to avoid at

www.fca.org.uk/scams

• Consider that if you buy or sell shares from an unauthorised
firm you will not have access to the Financial Ombudsman
Service or Financial Services Compensation Scheme.

By telephone:
If calling from within the US: (888) 269 2377 (toll-free).

If calling from outside the US: +1 201 680 6825.

By email: shrrelations@cpushareownerservices.com

Website: www.mybnymdr.com

** Lines are open 8:00am to 4:30pm Monday to Friday for dealing, and until

6:00pm for enquiries.

Financial calendar

Ex dividend date – final dividend
Record date to be eligible for the final dividend
AGM
Interim management statement – Q1 year ending 31 March 2020
Final dividend payment date
Interim results announcement – year ending 31 March 2020
Ex dividend date – interim dividend
Record date to be eligible for the interim dividend
Interim dividend payment date

All dates are indicative and are subject to change.

13 June 2019
14 June 2019
17 July 2019
17 July 2019
19 July 2019
21 November 2019
28 November 2019
29 November 2019
3 January 2020

204

Severn Trent Plc Annual Report and Accounts 2019

Design and production by Radley Yeldar www.ry.com

This report has been printed on Galerie Satin, a paper which
is certified by the Forest Stewardship Council®. The paper is
made at a mill with ISO 14001 Environmental Management
System accreditation.

Printed by CPI Colour using vegetable oil based inks, CPI is a
CarbonNeutral® printer, certified to ISO 14001 Environmental
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Management and Audit Scheme.

Severn Trent Plc
Registered office:
Severn Trent Centre
2 St John’s Street
Coventry CV1 2LZ

Tel: 02477 715000
www.severntrent.com

Registered in England and Wales
Registration number: 2366619