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Severn Trent Plc
Annual Report and
Accounts 2020
TAKING
CARE OF
ONE OF
E
L
I
S
F
S
E
E
S
N
T
I
A
L
S
’
TAKING CARE
OF ONE OF
LIFE’S ESSENTIALS
We provide clean water and waste water
services and develop renewable energy
solutions through our businesses.
REGULATED WATER AND WASTE WATER
Our regulated water and waste
water businesses Severn Trent
Water (excluding Bioresources)
and Hafren Dyfrdwy.
The primary activities we focus on
– Wholesale operations and engineering
– Household customer services
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 4.6 million households and
businesses in the Midlands and Wales.
Turnover (£m)
Profit before interest and tax (£m)
£1,620.7m +2.4%
£511.5m -1.3%
Underlying profit before
interest and tax1 (£m)
£511.5m -2.9%
Households and
businesses served
4.6m
Litres of drinking water
supplied each day
Litres of waste water
treated each day
2.0bn
Employees2
5,824 +2.5%
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.
3.2bn
Revenue split
1. Severn Trent Water
2. Hafren Dyfrdwy
2
1
98%
2%
BUSINESS SERVICES
Where we operate
Business Services operates in the UK.
There are five parts of Business Services:
– Bioresources
Business services includes the sludge
treatment and related renewable
energy generating activities within
Severn Trent Water.
– Green Power
Business Services, through Severn Trent
Green Power, generates renewable energy
from anaerobic digestion, crop, hydropower,
wind turbines and solar technology.
– Operating Services
Operating Services provides contract
services to municipal and industrial
clients in the UK and the UK Ministry of
Defence (‘MOD’) for the design, build and
operation of water and waste water
treatment facilities and networks,
and services to developers.
– Property Development
Property Development manages
the sale of surplus land.
– Other
Developer services and our property
searches and affinity partnership businesses.
Turnover
(£m)
Profit before
interest and tax
(£m)
£240.4m
£62.8m
+19.7%
-0.5%
Underlying profit
before interest
and tax1 (£m)
£64.9m
+1.2%
Employees2
962
+8.2%
1 Alternative Performance Measures are defined in note 44 to the Group financial statements.
2
Average during 2019/20 see note 9 to the Group financial statements.
HIGHLIGHTS
Group turnover (£m)
Dividend per share (p)
Contents
2019
2020
1,767.4
2019
1,843.5
2020
93.37
100.08p
£1,843.5m +4.3%
100.08p +7.2%
Basic earnings
per share (p)
Underlying basic earnings
per share (p)1
2019
2020
133.4
2019
66.7
2020
66.7p -50.0%
146.0p +0.1%
Group profit before interest
and tax (£m)
Group underlying profit before
interest and tax (£m)1
2019
2020
563.3
2019
568.2
2020
£568.2m +0.9%
£570.3m -0.6%
1 Alternative Performance Measures are defined in note 44 to the Group financial statements.
145.8
146.0
573.6
570.3
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).
Sustainability case studies
Strategic report
1 Highlights
2 Purpose first
3
6 Business model
8 Chair’s statement
10 Our response to COVID-19
12
Chief Executive’s review
16 Sustainability at a glance
20 Our people
24
Engagement with our
stakeholders
28 Section 172 statement
30
Achieving our AMP6
strategic objectives
32 Key Performance Indicators
34 Market and industry overview
36 Our business plan for 2020-25
38 Performance review
50 Business services
51 Chief Financial Officer’s review
57 Risk management
58 Principal risks
63 Emerging risks
64 COVID -19 and Brexit statements
Non-financial information
65
statement
66 Viability statement
68 Going concern statement
Governance
69
Chair’s introduction to
governance
71 Governance at a glance
72 Board of Directors
74
Executive Committee
76 Governance framework
Corporate governance
77
statement
Nominations Committee report
Audit Committee report
Treasury Committee report
Corporate Sustainability
Committee report
87
91
97
99
102 Remuneration Committee
report
124 Directors’ report
129 Directors’ responsibility
statement
Group financial statements
130 Independent auditor’s report
137 Consolidated income statement
138 Consolidated statement of
comprehensive income
139 Consolidated statement of
changes in equity
140 Consolidated balance sheet
141 Consolidated cash flow
statement
142 Notes to Group financial
statements
Company financial statements
196 Company statement of
comprehensive income
196 Company statement of
changes in equity
197 Company balance sheet
198 Notes to Company financial
statements
Other information
203 Five year summary
204 Information for shareholders
1
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information PURPOSE FIRST
Our Purpose and Values
We believe that if we are united by a clear social purpose
we will deliver better outcomes for all our stakeholders –
our customers, our colleagues, our investors, the society
we live in and the environment we depend on. It also
makes good business sense. So at Severn Trent, we are
first and foremost driven by our purpose – ‘Taking care of
one of life’s essentials’ – and we’re guided by our values:
F
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The outcomes we deliver
Our two regulated water and waste water companies
– Severn Trent Water Limited and Hafren Dyfrdwy
Cyfyngedig – focus on the delivery of nine outcomes
designed with our customers to meet their needs and
those of wider society:
A COMPANY
YOU CAN
TRUST1
2
A
POSITIVE
DIFFERENCE
LOWEST
POSSIBLE
BILLS 3
4
A SERVICE
FOR
EVERYONE
5
AN
OUTSTANDING
EXPERIENCE
GOOD
TO
DRINK6
WATER
ALWAYS
THERE7
8
WASTE WATER
SAFELY
TAKEN AWAY
9
A THRIVING
ENVIRONMENT
OUR COMMITMENT
TO SUSTAINABILITY
Severn Trent is committed
to making decisions for the
long term – decisions that add
value for our customers, the
communities we serve and the
environment, and treating all
of our employees and other
stakeholders fairly.
This means we work to achieve
our outcomes in a sustainable
way – be it through taking care of
the environment, helping people
thrive or being a trustworthy
company. This is integral to the
way we operate.
Read more: page 16
2
Severn Trent Plc Annual Report and Accounts 2020
SUSTAINABILITY
BOOSTING
EMPLOYABILITY
For the past four years, Severn Trent has
partnered with Hereward College to offer
nine month internships to students with
disabilities and additional educational needs.
Without such opportunities these young people
are three times more likely to be unemployed
than their contemporaries without disabilities –
so offering real work experience can significantly
boost their chances of entering paid employment
after leaving college. The programme has been
hugely successful with 67% of our interns entering
paid employment after their internships – and
we’re delighted that nearly half have stayed
with us.
Taking part in the programme has also had
a positive impact on our people, inspiring
new ways of working and helping to reinforce our
inclusive culture which is so important to us as
a business. One of our colleagues working with
the programme described seeing their intern
graduate into permanent employment as one of the
highlights of their 17-year career at Severn Trent.
SUPPORTING
FARMERS TO PROTECT
WATER QUALITY
Farmer Charles Antrobus has applied to the
Severn Trent Environmental Protection Scheme
(‘STEPS’) for the last three years, each year
receiving the maximum £5,000 grant. Supporting
his largely arable 430 hectare holding of wheat,
oilseed rape, barley, oats and beans, Charles is
experimenting with mob-grazing for his herd of
20 British White beef cattle, whereby fields are
given more time to rest and not grazed as hard.
Charles has used the grants to plant cover crops,
purchase electric fencing for the mob-grazing and
to build a sprayer wash-down area with bio-filters
and a rain water capture system. In addition to
water quality improvements, Charles has seen
improvements to soil health and an increase in
wildlife, especially small birds.
“ I’ve seen these relatively small
changes make a big difference,
which motivates me to continue
making improvements. I’m proud
that I’m sending clean water
downstream – protecting our
soils is crucial for both our
farm’s productivity and our
shared responsibility to protect
the environment,” says Charles.
3
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information
SUSTAINABILITY
CONTINUED
“ Can I just say in these difficult times this funding
is amazing – we have had a 400% increase in
calls and with this we can increase our support –
from the bottom of my heart, you have put a smile
on my face and a tear in my eye!”
Age UK Nottinghamshire
COMMUNITY FUND RESPONSE
TO THE COVID-19 OUTBREAK
At Severn Trent we’re committed to supporting
our vulnerable customers, and that’s why we’re
proud to have announced a COVID-19 £1 million
emergency fund to support charities and non-profit
organisations right on the frontline of the COVID-19
response across our regions.
We worked with local authorities and community
foundations across the Severn Trent Water
and Hafren Dyfrdwy regions to identify the
charities most in need and those helping the
most vulnerable in society. We then made
donations without requiring any sort of
application, ensuring we could get the
money quickly to where it is needed.
One of these charities was Age UK. We’re
delighted to have been able to provide funding
to 12 Age UK branches across our region
to support them as they help older people
who have no one else to rely on during the
pandemic; providing shopping for essential
items, prescription collection and daily
support calls to maintain social contact.
TRIALLING
A REVOLUTIONARY
LOW-CARBON
TREATMENT PROCESS
Last year we committed to net zero carbon
emissions by 2030 and this year we committed
to creating Science-Based Targets in line with
the goal of the Paris Agreement to limit global
warming to below 1.5 degrees. We know we have
to reduce the level of emissions that come from
our treatment processes which is why we are
working with partners across our supply chain
to trial a new way of treating waste water in our
sewage treatment process. A new process we
are trialling is an anaerobic membrane bioreactor
(‘AnMBR’) that allows us to treat waste water
anaerobically at lower temperatures than
traditional methods, based on 10 years of
research at Cranfield University.
Compared with conventional waste water
treatment, this new system has significantly
lower operating costs and a much smaller
carbon footprint. The process also produces less
nitrous oxide, a greenhouse gas around 300 times
more potent than carbon dioxide. The project is
part funded by the EU Horizon 2020 NextGen
programme and will begin to show results in 2022.
AnMBR is one of three projects underway at our
new Resource Recovery and Innovation centre
at Spernal – the first of its kind in the UK – that
allows us to run large-scale technology trials.
4
Severn Trent Plc Annual Report and Accounts 2020 SUPPORTING HAFREN DYFRDWY
CUSTOMERS
At Hafren Dyfrdwy, our Welsh water and waste
water company, we have a separate target for
supporting customers who struggle to pay their
bill. We are aiming to help 73% of customers
who struggle to pay by 2025.
We’ve been working hard to identify customers
in need of support. Our Welsh regions contain
many small, close-knit communities, and the
team recognises that building relationships
with community groups is vital. In partnership
with organisations such as Powys Association
of Voluntary Organisations, Warm Wales and
Newydd and Mid-Wales Housing, we are
proactively contacting customers who are
struggling to pay their bills – by telephone,
post, or even door-knocking days in communities
with a large proportion of customers who
could benefit from our support.
Customers can also apply for assistance online
through Here2Help, which launched in January
2020 and is already helping dozens of customers
to access the support they need.
This support is making a real difference to customers:
“ I met a lady at a food bank in Wrexham
who was looking after a family of four.
She was signed off work sick, and her
statutory sick pay had ended. I helped
her make an application to Here2Help.
Within a week, her monthly payment was
reduced from £67.50 to £12.35. I checked
in with her again to see if she needed
anything else, and she was so happy –
she couldn’t believe how much we were
able to help her!”
Katie, Hafren Dyfrdwy
5
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information BUSINESS MODEL
S We provide clean water every
S
E
N
time our customers turn on
the tap, and remove their
waste water in an affordable,
sustainable and reliable way.
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W
RESOURCES
PHYSICAL
ASSETS
A resilient, well maintained
network of clean water pipes
and reservoirs, sewers
and pumping stations.
We maintain over 49,000 km
of clean water pipes and over
92,000 km of sewer pipes.
NATURAL
RESOURCES
Water from reservoirs, rivers
and underground aquifers is
essential to support Severn Trent’s
operations and value creation.
We look after some of the
UK’s most impressive
natural resources.
Principal Risk: 6
Principal Risks: 6 and 7
FINANCIAL
CAPITAL
We have a strong balance sheet,
with gearing close to the regulatory
model. We are able to access a
range of capital markets to fund
future operations.
Our gearing is 65% (2019: 63%),
one of the lowest in the sector.
We have committed undrawn
facilities of £755 million.
Principal Risks: 9 and 10
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&
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WATER
IS COLLECTED
We pay the Environment
Agency and Natural Resources
Wales for the water we collect
from reservoirs, rivers and
underground aquifers across
our region.
WATER
IS CLEANED
Our groundwater and
surface water treatment works
clean raw water to the highest
standards, making it safe to drink.
CLEAN WATER
IS DISTRIBUTED
Our network of pipes and our
enclosed storage reservoirs bring
a continuous supply of clean water
right to our customers’ taps.
N
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C
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P
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G
Providing clean water and cleaning waste water
is an ‘energy hungry’ process so we use waste
and renewables to help us power our operations.
We are pleased to share that we have met
our target to produce the equivalent of 50%
of our own energy needs by 2020.
Food waste anaerobic
digestion plants generating
green energy
PHYSICAL
ASSETS
Our biggest ever five-year
period of capital investment
has now concluded.
Successful delivery of our
Birmingham Resilience Programme.
Replaced 260 km of our water
network (2018/19: 230 km).
NATURAL
RESOURCES
We’ve improved the biodiversity
of 244 hectares of Sites of
Special Scientific Interest
(‘SSSIs’) over AMP6.
FINANCIAL
CAPITAL
Delivering returns
for our investors.
Maintaining an investment
grade credit rating.
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Severn Trent Plc Annual Report and Accounts 2020
We do so through our regulated
subsidiaries and draw upon our skills
in water and waste treatment to provide
similar services to other organisations
through our Business Services division.
RELATIONSHIPS
OUR CUSTOMERS
AND COMMUNITIES
Our customers and communities
are at the heart of everything we
do. We aim to anticipate and meet
changing customers’ and wider
societal needs.
We serve 4.6 million households
and businesses.
Principal Risks: 1 and 7
OUR PEOPLE
AND CULTURE
Our culture and values support
Doing the Right Thing and drive
delivery of our strategy. We look to
attract, develop and retain talented
people from all backgrounds.
We directly employ over 6,700
people. Glassdoor reports that
87% of our people would
recommend us to a friend.
Principal Risk: 7
OUR SUPPLIERS
AND PARTNERS
Strong supplier relationships
support our business
operations in line with our
modern slavery commitments.
We work with around 1,700
direct suppliers.
OUR
REGULATORS
Our industry is regulated
by Ofwat and several other
regulators and public bodies.
We work with our regulators
to shape our industry. Our
Severn Trent Water Business
Plan was fast-tracked by Ofwat.
Principal Risk: 7
Principal Risks: 2,3 and 5
CUSTOMERS
ENJOY OUR SERVICES
We serve 4.6 million households
and businesses with a safe,
reliable supply of water and
collect waste water seven days
a week, every day of the year.
WASTE WATER
IS COLLECTED
Our network of sewers and
pumping stations collect
waste water from homes
and businesses and take it
to our treatment works.
WASTE WATER
IS CLEANED
Waste water is carefully
screened, filtered and treated
in our sewage treatment
works to meet stringent
environmental standards.
WATER IS RECYCLED
TO THE ENVIRONMENT
We pay the Environment
Agency and Natural Resources
Wales annual consent fees
to return the treated water
to the water system.
Solar
Wind turbines
Clean gas and green electricity
from our sludge anaerobic
digestion plants
OUR CUSTOMERS
AND COMMUNITIES
One of the lowest bills in
England over the last decade.
We helped around 70,000
customers through social
tariffs and assistance
schemes (2019: 52,800).
OUR PEOPLE
AND CULTURE
Developing people from all
backgrounds in line with our
Social Mobility Programme.
OUR SUPPLIERS
AND PARTNERS
Building sustainable
relationships that
provide mutual benefit.
30% of our graduates are from a
Black, Asian and minority ethnic
(‘BAME’) background (2019: 31%).
298 suppliers are signed up
to our Sustainable Supply
Chain Charter (2019: 258).
OUR
REGULATORS
We stimulate regulatory
debates to improve
services for customers
across the industry.
Launched the World
Water Innovation Fund.
7
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information
CHAIR’S STATEMENT
Christine Hodgson
Chair
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Taking care of one of life’s essentials
I am delighted to have been given the opportunity to chair
Severn Trent and what an extraordinary time to have started
this role. I was fortunate to complete over 20 days of induction
before lockdown and during that time I was struck by many
qualities about the organisation, most notably its very strong social
and environmental purpose, the passion and commitment of the
Severn Trent workforce to deliver essential services for customers
and the excellent leadership team focused on performance.
The rapid, effective and caring response to the current COVID-19
pandemic has shone a light more than ever on these qualities.
Although the majority of the financial year was unaffected by
COVID-19, the ongoing impact is significant. As for all organisations,
the pandemic has caused a significant shift in the way we operate
and brings numerous and serious risks. We have an experienced
management team that has a strong track record of dealing with
incidents and to tackle this crisis they have set up incident teams to
ensure we keep the core business operating and protect the health
and wellbeing of our colleagues and customers. The teams are also
identifying and considering a range of scenarios arising from the
pandemic, and putting in place the appropriate plans to deal with the
impact on our business, our operations and our customers. The Board
receives weekly updates from the Executive on the provision of core
services, how we are supporting colleagues and the community, and
the mitigation of the risks to our business.
Following the year end, the Board has considered and monitored the
potential economic impacts of COVID-19, in particular financing and
liquidity. This activity included modelling plausible and extreme
scenarios to determine expected impacts and test the Group’s financial
resilience. Modelling to date shows that, while there will be a financial
impact, neither the plausible or extreme scenarios we have modelled
would result in an impact to the Group’s expected liquidity, solvency or
debt covenants that could not be addressed by mitigating actions, and
are therefore not considered threats to the Group’s financial resilience.
Additional detail can be found in our viability statement on page 66.
However, there remains a risk that the impact of COVID-19 is greater
than that modelled by the Group.
Our strong financial position was a factor in our decision to declare a
final dividend in line with our AMP6 dividend policy of growth of RPI plus
at least 4% per annum. Read more in Liv’s Chief Executive’s review on
page 12.
Serving our customers
and taking care of one
of life’s essentials.
Meeting employees at our East Birmingham food waste plant
8
Severn Trent Plc Annual Report and Accounts 2020
Our culture
In March, I was proud to host some of our investors and other key
stakeholders at a Capital Markets Day at our head office in Coventry
where they could learn about the bold and wide-ranging sustainability
commitments which are at the heart of our strategy and see how these
are embedded in the way the business is run. Investors appreciated
the opportunity to experience the unique culture of Severn Trent
which differentiates us. Liv’s Chief Executive’s review provides
more detail on this and our new Purpose and Values which were
launched during the year.
We know that the long-term success of our Company is intrinsically
linked to the health of the natural environment and the wellbeing
of our customers, colleagues and communities. Our sustainability
commitments reflect this – focused on making a positive impact on the
region we serve, the people who live and work here and the environment
around us. To us these are not just words on a page – they are woven into
our business plan – in projects to protect the environment and enhance
biodiversity, the creation of an inclusive workplace, the support we give
to our communities, in the high performance standards we set ourselves
and the robust corporate governance we live by. You can find further
details of our sustainability framework, commitments and performance
in our first standalone Sustainability Report and on page 16.
We have used the head start from Ofwat awarding our AMP7 plan
fast-track status to prepare for the next five years. We will of course
keep our business plans under constant review as a result of COVID-19,
but we have well-developed, adaptable plans in place to ensure we
continue to deliver outperformance in AMP7. Further details of our
excellent AMP6 operational performance are contained in Liv’s Chief
Executive’s review.
Sharing the rewards
Under our industry’s regulatory framework, delivering
outperformance on our commitments to customers in turn creates
financial rewards. We highlighted last year that being socially
responsible means that when we perform well, we can share the
financial benefits of our work with all stakeholders. We have reinvested
outperformance over the last five years to help our vulnerable
customers, improve our water quality and increase the security of
supply to our customers.
This year, we have also accelerated the distribution of our newly
established Community Fund, where we set aside 1% of Severn Trent
Water’s profits for the benefit of community projects to help the most
vulnerable people. We have also committed £1 million to support
groups and charities helping those impacted by COVID-19 in our
region; comprising £500,000 re-directed from the Community
Fund and £500,000 from historic share forfeiture proceeds.
We have delivered another strong financial performance this
year, with Group turnover of £1,843.5 million, an increase of 4.3%.
Underlying earnings per share was 146.0 pence, up 0.1% from the
prior year, and basic earnings per share was 66.7 pence, down 50%
from the prior year. We are therefore proposing a final dividend of
60.05 pence per share to be paid on 17 July 2020, taking the total
dividend for the year to 100.08 pence per share.
Your Board
I was pleased to join Severn Trent as a Non-Executive Director
on 1 January 2020 and to succeed Andrew Duff as Chair from
1 April 2020. On behalf of the Board I would like to thank Andy for
his strong leadership and commitment over the last nine years.
He has successfully overseen a huge amount of positive change
over that period. I am personally grateful to Andy for the time and
invaluable support he has generously given to me during my induction.
The Board has been particularly welcoming to me and I would like
to take this opportunity to welcome Sharmila Nebhrajani who was
appointed as a Non-Executive Director on 1 May 2020. From her
extensive and varied career, Sharmila brings complementary skills
and diversity to our Board. You can read more details about the
recruitment process on page 87.
From my early interactions with the Board, it is evident that the
Board and Committees function well with high levels of engagement
from all members and an appropriate level of challenge and support.
Details of the Board’s work, including the various Board Committees,
is included in the Governance report on page 69.
Outlook
Severn Trent is a stable, exceptionally well-run organisation with a
dedicated workforce. While COVID-19 has brought unprecedented
uncertainty, I am confident that we will deliver the commitments we have
made for AMP7 for all our stakeholders. We will continue to take care of
one of life’s essentials for our customers and to support the communities
in which we operate. Never has our role been more important.
Christine Hodgson
Chair
100.08p
Dividend per share
2019: 93.37p
£1,843.5m
Group turnover
2019: £1,767.4m
£568.2m
Group profit before
interest and tax
2019: £563.3m
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Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information OUR RESPONSE TO COVID-19
The impacts of COVID-19 are being felt across
the globe. As a socially purposeful company,
we have carefully considered how we can
make a positive impact for the good of our
stakeholders but also for wider society.
This section provides a snapshot of how we have approached the COVID-19 crisis since mid-March 2020;
from managing our operational response, to mitigating as much risk as possible while providing the widest
range of support possible to our stakeholders. It also directs you to sections of the Annual Report where
you can find more detail on each of the matters below.
We have a well-rehearsed approach to incident management and while COVID-19 presents many unique
challenges, the governance structure we have implemented has provided a stable foundation from which
we can respond to the changing situation. Our Strategic Incident Team, comprising Executive Committee
members, led the swift implementation of plans and we continue to provide services to customers while
keeping our people safe and well. Our COVID-19 response governance framework is set out below.
Our COVID-19 Governance Framework
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MEMBERSHIP: SENIOR LEADERS
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1. The Board oversees the
Strategic Incident Team’s
response to the COVID -19
pandemic. The Board
receives at least weekly
updates on progress and
stakeholder impacts.
2. The Strategic Incident Team
leads the Company’s COVID-19
response and oversees the
Tactical Incident Team.
The Strategic Incident Team
considers how current and
developing scenarios will
impact in the medium term
and plans an effective response
to ensure the continued
resilience of our operations.
3. The Tactical Incident Team is
focused on ensuring that the
Company maintains normal
business operations, mitigates
risks to core services, protects
the health and wellbeing of our
people and protects the health
of our customers.
4. Internal controls and processes
are continually reviewed and
updated to enable efficient
delivery throughout, and
beyond, the pandemic. Read
more about our system of
internal control on page 94.
5. Stakeholder impacts, and
wider societal benefits, are
considered at all levels of
our COVID-19 response,
including the consequences
of our decisions on them.
Our stakeholder engagement
process enables us to carefully
consider all the relevant factors
and select the best course of
action. Read more about our
approach to stakeholders in our
s.172 statement on page 28
and stakeholder engagement
section on page 24.
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Severn Trent Plc Annual Report and Accounts 2020
Business and
stakeholder Impacts
Our COVID-19
response
SUPPORTING
OUR CUSTOMERS
Maintaining
normal
business
operations for
our customers
– Our teams continue to work tirelessly to provide a great experience for our customers – keeping
them on supply and taking their waste safely away. We’ve received some wonderful feedback
from customers recognising the dedication of our teams at this time.
– Our priority remains the safety and wellbeing of our customers and people. We’ve implemented
revised working practices, with virtual remote technicians, at-home network monitoring,
and kept small teams together, to ensure we keep people as safe as possible while delivering
essential services.
– We have kept customers reassured and informed throughout the COVID-19 period through
regular content across a number of channels, including emails, social media, TV and radio.
Protecting our
vulnerable
customers
– Making sure our vulnerable customers know we are there for them with targeted communications
and support through our Priority Services Register.
– We continue to partner and support Local Resilience Forums by providing advice and guidance
in respect of vulnerable customers and ensuring that they have access to the most up to date
information to support vulnerable people in our region.
Supporting
customers
who are
struggling
to pay
– We have a range of initiatives for those struggling to pay their bills, including the WaterSure
scheme for those on low incomes and our Big Difference Scheme, which offers bill discounts
of 10%-90% for eligible customers.
– Making £3.5 million available as part of our Severn Trent Trust Fund for those who may be unable
to pay their household bills at this time.
– These schemes have historically helped thousands of people when they needed our support the
most. At this critical time for many, we have redoubled our efforts to raise awareness of these
schemes for customers.
TAKING CARE OF
OUR COLLEAGUES
Caring for
our colleagues
– Our priority remains the safety and wellbeing of our people and customers. We are supporting
our key workers with the processes, personal protective equipment and other equipment they
need to continue to deliver our essential services. Our IT infrastructure has proved to be stable
and resilient which has allowed over half our workforce to work safely from home so we can be
there for our customers 24 hours a day, seven days a week.
– We will not be making any redundancies or furloughing any of our employees as a result of
COVID-19 and we are maintaining our all-employee bonus in recognition of our colleagues’
hard work over the last year. We have agreed an annual pay increase of 2.3% for our colleagues
for the next three years to provide certainty and security for them and their families.
– Launched a ‘Caring for our Colleagues’ campaign, providing support on mental and physical
wellbeing, and agreed individual care plans for our colleagues living in a vulnerable situation.
Key workers
– Around 50% of our workforce meet the Government’s definition of key worker. As a major
employer and provider of essential frontline services, the health and safety of our colleagues
is paramount and additional safety protocols have been implemented.
– As described above, our priority remains protecting the health and safety of our people.
HELPING TO MAKE
A DIFFERENCE TO
OUR COMMUNITIES
Social
responsibility
– In addition to helping our customers directly, we have established a COVID-19 £1 million
emergency fund to support charities and community projects at the forefront of the region’s
COVID-19 response, with over £500k already donated to 200 organisations.
– We launched a virtual education zone to help parents with home-schooling – through activities,
games and stories to inspire the next generation of water users.
– We’ve prioritised our services to ensure that schools serving key workers and hospitals have
access to uninterrupted services.
– Our Chair, CEO and CFO have asked the Company to donate 25% of their salaries for three months
to local charities in our region which are helping the response to COVID-19.
WORKING WITH
OUR SUPPLIERS
AND
CONTRACTORS
Supporting our
supply chain
– We’re helping our SME suppliers by moving to immediate processing of payments for at least
three months – in April we paid £38 million to our smaller suppliers early.
– We’re working closely and collaboratively with our whole supply chain to provide support in
respect of their underlying COVID-19 plans and continuing to invest in our capital construction
projects when it is safe to do so. This is an important focus given their roles as key employers
in our region.
ENSURING THE
LONG-TERM
SUCCESS OF
OUR COMPANY
Financial
resources and
assumptions
Read more
on page 66
– The Board and Strategic Incident team have continually monitored the situation to ensure early
detection of any deteriorating trends. We have modelled plausible and extreme scenarios to
determine expected impacts and test the Group’s financial resilience. Our strong financial
position means that we are well placed to withstand the economic shocks that COVID-19 might
bring. Read more in our viability statement on page 66.
Risk
management
Read more
on page 57
Final dividend
– We continue to monitor the impact of the COVID-19 pandemic across all areas of our business as
part of our established Enterprise Risk Management (‘ERM’) processes and a detailed COVID-19
statement can be found on page 64.
– Our strong financial position was a factor in our decision to declare a final dividend in line with
our AMP6 dividend policy of growth of RPI plus at least 4% per annum. Read more in Liv’s Chief
Executive’s review on page 12.
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Liv Garfield
Group Chief Executive
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“On every day, in every way,
I cannot commend our entire
workforce enough for their
dedication in keeping our
vital services going.”
£568.2m
Group profit before
interest and tax
2019: £563.3m
£1,843.5m
Group turnover
2019: £1,767.4m
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I could not start my review without first referring to the devastating
impact that COVID-19 has made across the globe. During these
unprecedented times our role here at Severn Trent has become ever
more crucial – making sure we continue to provide our vital services
to our 4.6 million households and businesses. I knew when I joined
Severn Trent six years ago that it had a special and unique culture of
caring for the essential public service we provide and this has never
been more evident than right now, in the midst of this current crisis.
So this year, I wanted to take the time to dedicate my review to our
people – who have been magnificent and selfless in continuing to
provide our essential public service. From our teams who are making
sure our customers are getting clean water and having their sewage
taken away, to our people going into customers’ houses to help deal
with their issues; from our dedicated customer services teams who
are aiding our customers with their bills and issues, to our people
who are juggling childcare whilst working from home. Some of the
individual stories of our workforce going beyond the norm are truly
incredible, like our employees who’ve suggested deferring their
retirement to continue to work; teams buying provisions for some
of our most vulnerable customers; and, colleagues suggesting they
stay on site 24/7 to make sure they are available to do their job – to
guarantee that they can keep our water flowing and treat waste. On
every day, in every way, I cannot commend our entire workforce more.
I think it is important for me to provide you with an update of what we
have done in response to COVID-19 and how we will continue to deal
with it. I also think we shouldn’t forget all the great things we’ve
achieved over the last year, and so I want to share our new Purpose
and Values, our approach to sustainability, our strong performance
over the year and our commitments looking ahead for the next five
years, making sure we continue to deliver for all of our stakeholders.
Severn Trent Plc Annual Report and Accounts 2020
COVID-19 – THE IMPACT ON SEVERN TRENT
Protecting our people
The Government designated our employees as key workers,
recognising that our employees’ roles are vital to public health
and safety during the coronavirus situation. We undertook an
exercise, together with other water companies, to identify which of
our employees were absolutely essential to providing our service.
We didn’t think it was the right thing to do to designate all of our
employees as key workers, in the end identifying around 50% of our
employees as key. This was to ensure we kept as many people as
we could at home in line with Government advice and also so that
we didn’t take up any more school spaces than absolutely necessary.
We took action quickly and deployed our already well-developed
business continuity plans. This allowed us to assess very quickly
which of our colleagues were required to work on our sites versus
those who could work at home in line with Government advice. Our IT
team worked really hard to make sure everyone had access to the right
equipment and access to our systems remotely to carry on doing their
work, demonstrating the resilience of our technology infrastructure.
We also rapidly identified our most vulnerable employees and our
employees who live with someone who is vulnerable, in line with
the Government guidelines for vulnerable people, e.g. anyone over
the age of 70 or having underlying health problems. We contacted
all of these employees individually and agreed individual care plans
with them.
We deployed revised working practices, with virtual remote
technicians, at-home network monitoring, and kept small teams
together, to ensure we keep people as safe as possible while
delivering our essential services.
Helping our customers and communities
Our priority is to make sure everyone’s as safe as they can be while
ensuring we keep our services running for all of our customers. We
therefore established new ways of working with our customers when
we visit them. These include working to reduce the possibility of our
teams coming into contact with customers when we need to get into
their homes or business to carry out work; agreeing a plan with our
customers before we visit to carry out those tasks in a way that keeps
everyone as safe as possible, and, if our customers are uncomfortable
with how we want to do things, we agree to postpone the visit. We also
encouraged our customers to let us know if they’re vulnerable in any
way, in order to encourage them to join our Priority Services Register,
ensuring that if they experience an issue with their water, we can give
them the support they need.
We know some of our customers will be struggling financially as
a result of COVID-19. Whilst we continue to bill customers for our
services, we have been helping those customers who have told us
they are in financial difficulty by referring them to our WaterSure
scheme for those on low incomes and our Big Difference Scheme,
which offers bill discounts of 10%-90% for eligible customers. We’ve
also made £3.5 million available as part of our Severn Trent Trust Fund
for those who may be unable to pay their household bills at this time.
As Christine highlighted in her Chair’s statement, we have also used
our Community Fund to help provide support to people in our region
who are affected by COVID-19.
We took the difficult decision to shut our visitor sites before the
Government required us to do so. We know how popular our sites
are, but as the wellbeing and safety of our visitors, communities
and colleagues is the most important thing, we took action quickly
to close sites and limit the risk of spread of COVID-19.
We have been working hard to prioritise our work to make sure we
keep our schools, serving key workers, and hospitals, including the
new temporary hospital the Government has set up in our region, open
by responding to their problems as quickly as possible. We continue to
look at ways in which we can support all of our communities, across
our patch, and I take great personal pride in the way we are helping
where we can.
The financial impact of COVID-19
We have been closely monitoring the situation to ensure early detection
of any deteriorating trends. We expect that there will be an impact on
our cash collection as a result of COVID-19. Whilst we will help people
as much as we can, we will also ensure that we continue to collect our
charges for the services we provide. We have modelled plausible and
extreme scenarios to determine expected impacts and test the Group’s
financial resilience. Our strong financial position means that we are
well placed to withstand the economic shocks that COVID-19 might
bring. Read more in our viability statement on page 66.
Final dividend
Our strong financial position was a factor in our decision to declare
a final dividend in line with our AMP6 dividend policy of growth of RPI
plus at least 4% per annum. The Board considered carefully the
unprecedented circumstances in relation to this year’s dividend and
took into consideration the Group’s prospects and financial position;
stakeholder interests including customers, shareholders, employees
and our communities; and the Board’s decision not to use any of the
Government’s business support measures. Recognising the critical
role that dividends play in providing necessary income for pensioners
and savers, and the significant number of employee and former
employee investors, the Board determined that based on the strong
performance in 2019/20 and the underlying financial position of the
Company it remains appropriate to recommend to shareholders
that a final dividend for year ended 2019/20 be paid.
£570.3m
Underlying Group PBIT1
2019: £573.6m
7.2%
Dividend increase
2019: 7.9%
£35.9m
Net ODI reward2
2019: Net penalty
of £4.5m
1
Alternative Performance Measures are defined in note 44 of the Group financial statements.
2 Group Outcome Delivery Incentives (‘ODI’) quoted pre-tax in 2012/13 prices.
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CHIEF EXECUTIVE’S REVIEW
CONTINUED
Champions volunteering scheme, where our employees volunteered
over 10,000 hours of their time over the year to improve the local
environment and help communities thrive in our patch. We cleaned
up rivers, looked after our visitor sites, planted trees and picked
up rubbish. This is testament to the enthusiasm and loyalty our
workforce has for the area that they work and live in.
Sustainability at our Core
Sustainability and social purpose may be the new buzz words –
but for us these have always been central to the way we work
and core to the success of our Company. Last year we shared
how we believe that a business with a strong sense of social
purpose like ours delivers better and more sustainable
outcomes for stakeholders over the long term.
This year, we wanted to focus on our Sustainability Framework,
which we designed to capture all the great things we are doing
across the Company that demonstrate our commitment to being
a sustainable company. I know only too clearly how much we rely
on our environment to provide our services, and the acute risks
we are facing from climate change. That’s why I am personally
delighted to share that in the next five years we will do more for
the environment than ever before, through a number of long-term
ambitions, enabling us to support our Purpose. We will do all of
this while keeping customer bills among the lowest in the land.
These commitments are integral to the delivery of the customer
outcomes agreed in our business plan for the next five years and
also in securing a sustainable long-term future for the business
we run. As part of our plan we have chosen to invest £1.2 billion
in delivering these sustainability commitments.
CHIEF EXECUTIVE’S REVIEW
FOR YEAR ENDED 31 MARCH 2020
We have had a busy and eventful year that we can look back on with
pride, and it is to that I would like to turn to now. We agreed our PR19
fast-track plan with Ofwat, which was commended for its approach
to being socially purposeful and building customer trust. We launched
our new company Purpose and Values and implemented our new
Sustainability Framework, formalising our forward-thinking approach
to sustainability and embedding it in the Company. We delivered
another strong year of operational performance and successfully
completed our AMP6 capital programme, while getting ready for the
efficient delivery of our AMP7 five-year plan. It’s my great pleasure
to share some more details about these below.
Our new Purpose and Values
I am truly delighted to introduce our new company Purpose and
Values which have been put together collaboratively by our people,
for our people. We know that what we do is crucial for our customers
to live their daily lives, and our new purpose of ‘Taking care of one of
life’s essentials’ recognises this. We also wanted to reflect what it
really feels like to work at Severn Trent, that’s why our Values are
Having Courage, Embracing Curiosity, Showing Care and Taking
Pride. Not only do these genuinely show what we are about, they
really resonate with our people.
We know first-hand that having a strong culture, built around
a highly engaged workforce, not only ensures we continue to deliver
great performance but also that we continue to make Severn Trent
a truly awesome place to work. This is borne out by our excellent
engagement score of 8.1 out of 10, putting us in the top 5% of utility
companies globally, and by the reviews that Severn Trent employees
leave on Glassdoor, placing us consistently at four out of five. We also
see it through the commitment our employees make to our Community
14
“These commitments
are integral to the delivery
of the customer outcomes
agreed in our business plan for
the next five years and also in
securing a sustainable long-
term future for the business
we run. As part of our plan
we have chosen to invest
£1.2 billion in delivering these
sustainability commitments.”
Severn Trent Plc Annual Report and Accounts 2020
This includes some fantastic and unique
commitments, for example:
Deliver our Triple Carbon Pledge of
net zero emissions, 100% energy
from renewable sources and 100%
electric fleet, all by 20301 – and
develop Science-Based Targets
Support 195,000 customers
every year who struggle to pay
their bill, by 2025
Enhance the biodiversity of
5,000 hectares of habitat by 2027
Work with almost 9,000 farmers to
adapt working practices and adopt
nature-based solutions to reduce
pollutants in 44 catchments
Donate 1% of Severn Trent Water’s
profits each year over the next five
years (over £10 million) into the Severn
Trent Community Fund, investing in
projects in our local communities
These are but a few of the brilliant examples I could have chosen
to highlight. In fact, there are so many examples I could have
picked, but in order to make sure we shared our plans as fully as
possible with our stakeholders, we have decided to publish our very
first Sustainability Report which can be found on our website. In the
report, we set out our commitment to taking care of the environment,
helping people to thrive, and being a company our stakeholders can
trust. We believe that by making decisions with all these issues in
mind, we will secure a sustainable, long-term future for our business.
Our performance
We know that building a lasting legacy for our customers today and
for future generations is one of our most important responsibilities.
That’s why I have to start my review of our performance by referring
to the completion of our capital programme, including our £300 million
programme to improve resilience for Birmingham’s water supply,
£280 million to improve the health of rivers in our region as part of
the Water Framework Directive, and £150 million on sewer flooding
improvements, including a strategic upgrade of the waste water
network in Newark which should protect homes and businesses
from sewer flooding for decades to come. It was a massive effort
to make sure we delivered these schemes on time and to quality. We
knew that these improvements were so important to our customers,
that we had a number of AMP6 customer ODIs covering the capital
programme – which I am now pleased to confirm we have delivered.
We also can look back over AMP6 and be proud of the big service
improvements we delivered for our customers:
– 28% reduction in water quality complaints since 2015.
– 48% reduction in external sewer flooding since 2015.
– 62% reduction in supply interruptions year-on-year.
– Outperformed our leakage target of 6% over the AMP.
– Our lowest number of pollutions in a decade.
– We generate the equivalent of over 50% of our energy needs from
our own renewable energy sources.
– Helping more customers than ever with their bills, with around
70,000 people offered support.
We have achieved a lot over the last five years: we’ve delivered on
our promises, made investments for the long term, and have a track
record of delivering strong financial performance for our investors.
Looking to the future – Delivering our AMP7 plan
Our business plan focuses on nine outcomes that we’ve designed
to meet the needs of our customers and wider society. While these
have a long-term perspective and look 25 years ahead, the next five
years will see real progress – driven by the performance commitments
that are designed to hold us to account to our customers. We will invest
more than £6.8 billion in new and existing assets to make our service
even better. On top of this, during 2020-25 we’re going to deliver our
biggest bill reduction for two decades.
For less than £1 a day, more than 4.6 million households and businesses
across the Midlands and Wales will get all the fresh water they need
delivered straight to their taps and all of their waste water taken away.
Over the next five years, we will also increase our support for tens of
thousands more customers who are least able to afford their bills,
with a range of measures from water saving devices to payment
plans or reduced charges, for 195,000 people a year by 2025.
We believe we’ve created a responsible, challenging but achievable
plan that will set the benchmark for how a privately owned company
can deliver public good, not just in the water sector but across UK
industry in general.
COVID-19 has clearly damaged companies in many sectors and the
subsequent impact on the economy is significant. Whilst the impact of
COVID-19 on our plans is not entirely clear, we are well protected to be
able to deal with any financial shocks in the economy and continue to
deliver for our customers the vital service they need to live their lives.
I have absolute confidence that whatever happens in these uncertain
times, our amazing team of people who work at Severn Trent will be
working hard to make sure we perform for our customers, all of our
stakeholders and society as a whole.
Liv Garfield
Chief Executive
1 Assumes suitable specialist vehicles such as tankers become available within
that time window.
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Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information SUSTAINABILITY
As a company taking care of one of life’s essentials –
water – we know that the resilience of our business
is intrinsically linked to the resilience of our region,
its communities and the natural environment.
OUR PURPOSE
TAKING CARE OF ONE OF LIFE’S ESSENTIALS
TAKING CARE
OF THE
ENVIRONMENT
HELPING
PEOPLE TO
THRIVE
BEING A
COMPANY
YOU CAN TRUST
Ensuring a sustainable
water cycle
Delivering an affordable
service for everyone
Living our values
Secure water sources in the long term
– through catchment management,
demand reduction and climate change
adaptation – so that we can deliver our
services for future generations.
Work with our industry to end water
poverty by supporting customers
who struggle to pay their bills and
providing priority support to those
who need it.
Nurture a strong, open, one-team
culture based on company values
that articulate what we stand for.
Enhancing our natural
environment
Providing a fair, inclusive
and safe place to work
Balancing the interests
of all our stakeholders
Protect and enhance nature at each
stage of the water cycle by improving
biodiversity and stopping pollution,
benefiting nature, local communities
and our business.
Build a workforce that is reflective
of the community we serve, and
foster a culture where everyone
can be themselves, driving better
decision-making and performance.
Understand the needs of stakeholders
in order to make business decisions
that benefit shareholders, society
and the environment.
Making the most
of our resources
Investing in skills
and knowledge
Running our company
for the long term
Generate renewable energy and other
useful resources from our waste, and
aim for zero waste to landfill through
our business activities.
Support the skills base of our people
and our region, and inspire the next
generation of customers to adopt
more sustainable behaviours.
Put strong governance – leadership,
ethics, and management of risks
and opportunities – at the heart
of our business.
Mitigating
climate change
Making a positive difference
in the community
Being open about what we do
and sharing what we know
Play our part in reducing global
carbon emissions in line with the
Paris Agreement, aiming for net
zero carbon and supporting the UK’s
energy transition.
Serve our local communities through
community projects and volunteering,
and global communities through
charity partnerships.
Build trust through transparency, and
work with our sector on innovative
solutions to our shared challenges.
Linked SDGs1
Linked SDGs1
Linked SDGs1
1 United Nation’s Sustainable
Development Goals.
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Our long-standing commitment
to sustainability is demonstrated
in our leadership on renewable
energy generation, sustainable
management of our land, and
dedicated programmes to
support people and our local
community. We’ve reported on
these – and other sustainability
metrics – in our Annual Report
for several years.
But now we’re going further.
Over the next five years, we
will be investing £1.2 billion in
our sustainability ambitions,
from climate and biodiversity
to supporting the customers
who need us most.
As part of our commitment to
transparent reporting, we’re
publishing our first standalone
Sustainability Report, which
can be found on our website
at severntrent.com. This has
been developed following the
principles of the Global
Reporting Initiative (‘GRI’).
16
Severn Trent Plc Annual Report and Accounts 2020
SUSTAINABILITY
PERFORMANCE
HIGHLIGHTS
The table below shows selected highlights from our
sustainability performance in 2019/20 and over the last
several years. We also set out our long-term ambitions
that go beyond our business plan. For a full list of key
metrics see page 59 of our 2020 Sustainability Report.
Customer Outcome Delivery Incentive performance and
targets in the table below relate to Severn Trent Water only.
GRI index is available at:
severntrent.com
Theme
Performance
2020-25 commitments and long-term ambitions
TAKING CARE OF THE ENVIRONMENT
Leakage
2019/20: Reduced leakage by 4%
Ensuring a
sustainable
water cycle
Per capita
consumption
Water Quality
improvement
against Water
Framework
Directive (‘WFD’)
Catchment
management
Reduced leakage by over 8% over last five years,
exceeding 6% commitment
2019/20: Average per capita consumption in our
region is around 130 litres per head per day
Our water efficiency programme has delivered
around 25 Ml/d of water savings over five years
Over the past five years we have delivered
33 water and 246 waste WFD points, improving
1,600 km of river
Catchment management approach implemented
in 26 catchments over five years, engaging with over
5,000 farmers in our region
Enhancing
our
natural
environment
Making the
most of our
resources
Mitigating
climate
change
Biodiversity
Improved biodiversity in over 244 hectares of
SSSI-designated land over the last five years
Pollutions
2019/20: 288 Category 3 (minor incidents)
12% reduction on 2018/19 and our best
performance over the last decade
Biosolids
In the 2019 calendar year we recycled over
115,000 tonnes of dry solids to agricultural land
Waste diverted
2019/20: Waste audit completed providing better
visibility of waste streams, with some waste streams
as high as 99% diverted from landfill
Carbon Footprint 2019/20: 141 tCO2 net operational green house gas
emissions of Severn Trent per £m turnover
7% reduction on 2018/19 and 45% reduction on 2014/15
Electric vehicles 2019/20: Implemented policy to only purchase
Renewable
energy
electric cars from now on and only electric vans
from 2023
2019/20: From 1 April 2020 we have purchased the
remainder of our energy needs from renewable
sources, achieving our 100% renewable energy
commitment 10 years earlier than planned
Energy
Consumption
2019/20: Total energy consumption of 2,037 GWh
or 1.11 GWh per million of Group revenue
Renewable
energy
generation
2019/20: Self-generation of renewable energy by
Severn Trent Group increased to the equivalent
of 51% of Severn Trent Water’s energy needs
We delivered 491 GWh of renewable energy
across our sites
ODI target: 15% reduction by 2025
Long-term ambition: 50% reduction by 2045
ODI target: Reduce per capita water consumption
by 3.5% by 2025
Long-term ambition: Installing 500,000 water meters
by 2025
ODI target: Improve 211 WFD points by 2025
Improve the quality of a further 2,100 km of river by
2025, meaning over half the rivers in our region will
have improved by the end of AMP7
ODI target: Implement catchment management in
16 catchments
Long-term ambition: Engage with 9,000 farmers (63%
of those in our region) across 44 catchments to reduce
pollutants from agriculture
ODI target: Improve 1,090 hectares of biodiversity
by 2025
Long-term ambition: Improve the biodiversity of 5,000
hectares of habitat, not just SSSIs, across our region
by 2027
ODI target: 29% reduction in pollution incidents by
2025 to 19.5 incidents per 10,000 km of waste network
Long-term ambition: Reduce total number of pollution
incidents 50% by 2025
ODI target: 100% satisfactory sludge use
and disposal
Maximise the conversion of sludge into biogas
and other useful resources
Long-term ambition: We are actively working to set
clear targets across all waste streams, with an
ambition of zero waste to landfill
Triple Carbon Pledge: Net zero carbon emissions
by 2030
Commitment to set and report against
Science-Based Targets
Triple Carbon Pledge: 100% electric vehicles
by 2030 (where specialist vehicles such as tankers
become available within that time window)
Triple Carbon Pledge: 100% energy from
renewables by 2030
We continually invest in improving energy
efficiency and we have a dedicated energy
management team focused on driving
operational change to reduce energy
Continuing to invest in energy generation opportunities
17
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information SUSTAINABILITY CONTINUED
Theme
Performance
2020-25 commitments and long-term ambitions
HELPING PEOPLE TO THRIVE
Help when
you need it
2019/20: Around 70,000 customers received
financial support and advice, a 33% increase
from 2018/19
Delivering an
affordable
service for
everyone
ODI target: By 2025 support 43% of customers
who struggle to pay (195,000 customers annually)
Long-term ambition: Eradicating water poverty,
meaning that none of our customers will be faced
with a water bill that is more than 5% of their
disposable income by 2030
Commitment to contribute £3.5m annually
to support customers in need
Trust Fund
Priority
Services
Register
Value for
money
2019/20: £3.5 million annually donated to the Severn
Trent Trust Fund
Over £60 million donated to the Trust Fund to date
2019/20: 1.2% of household customers are on the
Priority Services Register
ODI target: 9.7% of customers with additional
needs on our Priority Services Register by 2025
2019/20: 66% of customers rated our services
ODI target: 65% of customers rating us good
as good value for money (based on quarterly
independent survey)
9% increase in the last five years
value for money
Employee
engagement
2019/20: Employee engagement score of 8.1/10
in employee survey, placing us in the top 5% of
utilities globally
Gender
diversity
2019/20: All employees – 71% Male, 29% Female
Graduates and Apprentices – 75% Male, 25% Female
Providing a
fair, inclusive
and safe
place to work
BAME
diversity
2019/20: All employees – 8.86% Ethnic minority
Graduates and Apprentices – 19% Ethnic minority
Social
mobility
2019/20: 43% of new starters and 39% of promoted
employees live in a social mobility cold spot
Maintain high employee engagement across
our workforce
Gender equality is a big part of our commitment to
all aspects of diversity and inclusion, it is absolutely
central to everything we do, and we know just how
much it means to our own people while also being
something we believe will help us attract the best
diversity of talent
We are looking at our data and internal systems
to understand how we will respond to the
requirements of the Government’s ethnicity pay
gap reporting legislation once it comes into force
We believe we have a role to play in helping
communities thrive and we are actively targeting
our employment campaigns in areas classed as
social mobility cold spots
Health and
safety
2019/20: Lost time incident (‘LTI’) rate of 0.20 per 100,000
hours at Severn Trent and 0.06 among contractors
We are committed to reducing LTIs with
a Goal Zero mindset
Employee
training
Education
Community
support
2019/20: 14,299 training days across our Company, an
average of 2.1 per employee
To have the most technically skilled workforce
in the sector
Over 800,000 customers reached since 2015
2019/20: Community Fund established
£500,00 from this fund made available to
support charities and not-for-profit organisations
struggling in COVID-19
A further £500,000 has been made available from
historic share forfeiture proceeds to help charities
recover as part of an overall COVID-19 emergency fund
ODI target: 155,250 behaviour change
commitments by 2025
Long-term ambition: Educate 500,000 school children
in the next five years around responsible water use,
sewer misuse and healthy hydration
Donate 1% of profits (over £10 million over five
years) via the Severn Trent Community Fund
Employee
volunteering
2019/20: Nearly 1,500 employees volunteered
All employees entitled to two paid days for
volunteering per year
WaterAid
2019/20: Raised over £120,000 for WaterAid
Raised over £1,320,000 for WaterAid between
2015 and 2019
Long-term ambition: 40% of employees volunteering
in our region every year
Raise £560,000 for WaterAid projects in
Bangladesh between 2019 and 2024
Investing in
skills and
knowledge
Making a
positive
difference
in the
community
18
Severn Trent Plc Annual Report and Accounts 2020 Theme
Performance
2020-25 commitments and long-term ambitions
BEING A COMPANY YOU CAN TRUST
Purpose
and Values
2019/20: New Purpose and Values co-created
with employees
Put our Purpose and Values at the heart
of our culture
Living our
values
Supplier
sustainability
2019/20: 52 of our key suppliers have pledged
to drive targeted action to support on carbon reduction,
resource efficiency and community engagement
2019/20: Across Severn Trent Plc, our payment
policies align with the Prompt Payment Code. Over
the last six months 97% of suppliers were paid in
line with the agreed payment terms. On average our
suppliers were paid within 30 days of us receiving
their invoice
We are committed to develop a holistic approach
to supplier sustainability, including high level
supplier heat mapping against key environmental
and social issues
Stakeholder
engagement
2019/20: First dedicated s.172 disclosure
(see page 28)
Balancing
the interests
of all our
stakeholders
Running our
Company for
the long term
Board
Leadership
and Diversity
* as at 1 May 2020
2019/20: Seven independent Board members,
including the Chair*
56% Board members are female*
11% Board members are from a BAME background*
In line with the Principles of the Parker Review,
the Board has been actively looking to appoint a
Non-Executive Director from a BAME background
for the last few years. The calibre of the candidates
identified in this year’s search was outstanding, and
it was after careful deliberation that the Committee
unanimously recommended the appointment of
Sharmila Nebhrajani to the Board from 1 May 2020
The principles underpinning s.172 are not something
that are only considered at Board level, they are
part of our culture. Impacts on stakeholders are
considered in the business decisions we make
across the Company at all levels
In line with our new Board Diversity Policy,
the Board remains focused on promoting
broader diversity, embedding inclusivity into
our succession planning and talent development
work and creating an inclusive culture
Business ethics
2019/20: 84% of employees completed e-learning
on our Code of Conduct, Doing the Right Thing
Colleagues rated the following statement 8.2 out of
10 (where 10 is highest and 1 is lowest), ‘If I suffered
or witnessed wrongdoing at work, I’d be confident
Severn Trent would respond appropriately’
Target: 100% of employees complete annual
e-learning on the Code of Conduct and business
ethics by those able to do so
Maintain employee confidence in whistleblowing
Sustainable
finance
Sustainable Finance Framework launched
and first £200 million raised through US Private
Placement debt issuance by Severn Trent Plc
Continue to raise funds under our Sustainable
Finance Framework
Modern slavery
2019/20: 97% of employees, excluding customer
contact centre teams, have completed modern
slavery e-learning
Continue to raise awareness around modern
slavery and how to raise concerns. Targeted
awareness will be rolled out to customer contact
centre teams over the next 12 months
Transparent
reporting
2019/20: First dedicated Sustainability Report
and GRI disclosure June 2020
We are committed to communicating clearly with
stakeholders on our strategy and performance
Fair Tax mark
2019/20: Fair Tax mark accreditation received
We are committed to act in line with the principles
of the Fair Tax mark
Living Wage
2019/20: Accredited as a real Living Wage employer
Target: 100% of supplier contracts specifying
the real Living Wage
Being open
about what
we do and
sharing what
we know
19
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information OUR PEOPLE
R
U
O
G
N
I
V
I
L
S
E
U
L
A
V
Our people are fundamental to delivering one
of life’s essentials and we believe our culture
is what makes us special. Our teams are
passionate about the positive role they can
play in helping customers and communities
thrive and they care that we create an
environment where everyone can feel
comfortable to bring their whole self to work.
This section is dedicated to showcasing our people: who we are,
our culture, and how we, at Severn Trent, work together as one
community – a community which supports each other to succeed,
recognises and rewards each other’s contributions, and listens
and talks to each other.
Our Values
Our new Values have been shaped by our people – we spoke to
hundreds of colleagues from around the business to understand
what’s important to them and what inspires them. Our Values are
the standards, behaviour and principles that we hold dear and guide
us in everything we do as we take care of one of life’s essentials.
Communicating together
We believe in open and honest communication throughout our
teams. This is an important step in encouraging and living our
shared values and creating an environment in which everyone is
inspired to do their best each day. During the year we launched
our new intranet, ‘On Tap’, which is regularly updated with all of
the latest news from across the Company.
The Company Forum provides an opportunity for employee and
Trade Union representatives to meet, once a quarter, and bring to
life feedback and discussions from operational forums, as well as
sharing discussion areas that give frontline representatives direct
access to the Executive and Board members. The agenda for these
sessions covers a range of topics that inform and lead to practical
changes in the way we work.
“WE’RE ABLE TO
PULL EACH OTHER
UP ON SOMETHING
THAT’S NOT QUITE
RIGHT, WHETHER
IT’S INTENTIONAL
OR NOT.”
“SOME CALL IT
NOSEY BUT BEING
CURIOUS HAS GIVEN
ME SO MANY NEW
EXPERIENCES.”
“OUR VALUES
HELP US
TO PROUDLY
REPRESENT
SEVERN TRENT
OUTSIDE THE
BUSINESS TO
EXTERNAL
CUSTOMERS.”
Stacie, Waste Water Recycling
Angela, CDC South East Infra Team
Ed, Liquid Commercial Waste Team
“I’M REALLY PROUD
THAT THE JOB I DO
ALLOWS ME TO TAKE
ACTIONS TO HELP
PROTECT THE
ENVIRONMENT.”
Our values:
“TO ENSURE WE GO
HOME SAFE AT THE
END OF EACH DAY
IT’S IMPORTANT WE
CARE ABOUT THE
HEALTH AND
SAFETY OF
OURSELVES AND
EACH OTHER.”
Colton, Senior Technician, Bioresources
Sam, Senior Technician, Non Infra
20
Severn Trent Plc Annual Report and Accounts 2020
THIS IS ME
We are committed to making our workplace one in which all can thrive and bring their whole self to work, no matter what. We are also
passionate about creating opportunities for all within our region and are proud of the work we are doing, encouraging applications from
‘cold-spot’ areas and of our employability programme working with Hereward College. Some of our employees share their experiences below.
ENCOURAGING
SOCIAL MOBILITY
APPRENTICESHIPS –
FEMALE ENGINEER
Hossam
Trainee Solicitor
Evie
Apprentice
43% of our workforce live in a social mobility cold-spot.
87% of our employees come from the communities we serve,
so the work we can do to help communities through providing
employment opportunities resonates strongly. We’re working
with schools and colleges from cold-spot areas to inspire the
next generation of talent to think about a career with Severn Trent.
Hossam came to Derby from Kenya and joined as an apprentice
after feeling there weren’t many options available to him:
“ Severn Trent provides a clear playing field
for every person in the Company, and as
someone who works here, I really feel like
I have a clear progression route and the
support I need to complete my course and
become a qualified solicitor.”
Evie is a third year apprentice in instrumentation, control and
automation engineering. After A-levels, her interest in electrical
engineering led her to apply for an apprenticeship at Severn Trent:
“ I expected going into engineering it would be
male dominated but I didn’t realise quite how
male dominated it would be…
… I’m the only girl on the team I’m in but they
don’t treat me any differently. Some of the jobs
are physically challenging, but I get the same
chances as everyone else.”
SUPPORTING LGBTQ+
OUR EMPLOYABILITY
PROGRAMME
Carl
Design Technician
Quinncy
Procurement support
Carl has been named Stonewall Gay Role Model of the year,
a huge achievement in recognition of his work to promote
LGBTQ+ diversity and inclusion at Severn Trent:
” Knowing we have a more inclusive workplace
now not only makes me proud of this
accomplishment and award but also proud
to work for Severn Trent. So, at Severn Trent,
if you relate as LGBTQ+ in any way, then
I wouldn’t call it ‘coming out’, I’d just call it
coming to work and being yourself.”
Quinncy – Ex-intern from Hereward College, now an employee
at Severn Trent:
“ When I first started, I was excited and a bit
nervous coming into a new environment with
different people. The college and Severn Trent
sorted us an amazing buddy who helped us
settle in and supports us in our job roles. The
internship has helped me be more confident
and independent in life.”
21
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information OUR PEOPLE
CONTINUED
Providing a fair and inclusive place to work
Providing an environment where everyone can succeed, regardless of
their education, gender, ethnicity, or situation, is an important part of
the culture at Severn Trent. Diversity in our teams brings diversity in
ideas and ways of working which will make us better in delivering for
the customers we serve. This was a key part of our Business Leaders’
day in March 2020.
We’ve been continuing our focus on providing a more inclusive
working environment for our LGBTQ+ employees and are pleased
to have improved our ranking in the Stonewall Workforce Equality
Index to 175 (2018/19: 414). This year has seen the launch of our Allies
programme with over 200 employees from across the Company
signing up and attending training to understand the role they can play
in creating a safe, inclusive workplace for all our colleagues. We also
continued to show support in our communities at the Birmingham and
Coventry Pride events.
We’re proud of our track record on gender diversity. Once again
we’ve been recognised in the Hampton-Alexander Review for our
performance on gender diversity, this year coming in the top three for
women’s representation amongst the Executive Committee and their
direct reports. Female representation in our senior leadership
population is 40% and, from 1 May, female representation on the Board
is now 56%. Page 88 sets out a gender breakdown of Directors, senior
managers (as defined in the 2018 Code and Companies Act 2006) and
employees of the Company.
In 2019/20 we’ve sought to do more for our colleagues with disabilities
or underlying health conditions and together with our Trade Union
partners have launched a Workplace Adjustment Passport. The
passport aims to help our colleagues with disabilities or underlying
health conditions when talking to their line managers about support
or adjustments needed to enable them to reach their full potential at
work. It also helps the smooth transition of adjustments from manager
to manager, or between areas of the business as they develop their
career at Severn Trent.
We know that more work can be done on ethnic diversity and we plan
to do more in this area to increase our representation of Black, Asian
or Minority Ethnic (‘BAME’) groups in the forthcoming year. In the last
12 months we have set up a BAME working group which is sponsored
by members of our senior management team.
Creating opportunities within our region
We believe our Company should reflect the communities we serve
and are actively reaching out to the areas of our communities which
are less well represented.
We are proud to be one of the UK’s top three companies in the Social
Mobility Index. This achievement reflects the way we work, from
reaching out to students and schools in areas of low social mobility,
to using a fairer recruitment process that gives equal opportunities to
all applicants. In the past year, 43% of our new hires were from areas
identified as being social mobility cold spots, and 39% of all internal
promotions were achieved by staff living in these areas. Our work in
this area is making a real tangible difference in the communities where
we live and work.
We’re also pleased to announce the launch of the Andrew Duff Bursary
Fund from 2020/21. In partnership with the Social Mobility Foundation,
each year we’re aiming to support up to 10 students who live in our
region with an annual bursary towards their living costs whilst they
study in further or higher education. We’ll also offer each successful
applicant a paid internship in the business and a dedicated mentor.
“It’s been quite a challenge to ensure we continue to resolve
customers’ issues whilst maintaining social distancing, but the
customers have been amazing and are so thankful we are out
here still as key workers, keeping their sewers flowing and resolving
any blockage issues so they can continue to use their toilets.”
Aiden, Network Technician, Waste Infra
SUPPORTING OUR PEOPLE DURING COVID-19
We are committed to protecting our people during the
unprecedented period of uncertainty brought by COVID-19. This
is a stressful time for many and we are encouraging people to talk
to each other and to ask for support when they need it. We’re also
communicating with our teams on a regular basis to update them
as the situation changes.
Around 50% of our people have been identified as key workers
under the Government’s plans to keep services running. We’ve
taken steps to protect the environment they work in by providing
the right health and safety equipment and wellbeing guidance
and by providing specific guidance on social distancing while
working on the network. We’ve also released a company video
on social media to ask our customers to observe social distancing
guidance when our teams visit.
We’re also mindful of the health and wellbeing of our colleagues
who are working or self-isolating at home, or have been affected
personally by the virus. At the end of the financial year we asked our
people to let us know if they fell into the vulnerable person category
and, following this, over 900 of our people have been contacted by
phone to discuss their individual needs and concerns. We’ve now
made a care package available for all our vulnerable colleagues to
keep them safe and support them during this period.
We’re pleased to have been able to provide stability and security of
pay for our workforce through this difficult period: we announced
that we would continue to pay our all-employee annual bonus,
agreed an annual pay increase of 2.3% for our colleagues for the
next three years and committed not to furlough or make any
redundancies as a result of COVID-19.
22
Severn Trent Plc Annual Report and Accounts 2020 More details of our ongoing partnership with Hereward College,
a school for students with learning difficulties in Coventry, can be
found on page 3.
Keeping our people safe and well at work
We believe passionately that no one should be hurt or made unwell
by what we do. We strive to create a supportive environment in which
mental health is no longer a taboo subject. We have trained 2,166
employees, representing 31% of our workforce, in mental health
awareness – the second highest in the FTSE100. We also provide
mental health training to new apprentices and graduates when they
join, to instil healthy working practices early in their careers.
We end 2019/20 with our second lowest LTI rate in 10 years. This
gives us confidence that our Goal Zero strategy and continued focus
on the four key hazards that cause us the most harm – driving for work,
musculoskeletal injuries from manual handling, mental ill health and
slips, trips and falls – are helping us to achieve our ambition that no one
gets hurt or is made unwell by what we do at work.
In April 2020 we launched a new wellbeing campaign,‘Caring for
our Colleagues’. This campaign focuses on four key themes – mental
wellbeing, physical wellbeing, physical safety and workplace set-up,
providing information and support for all colleagues, whether out in
the field or working in the office or home.
Fairly rewarding our people
The Company remuneration section, in the Directors’ Remuneration
report, explains how we strive to make our pay and reward framework
transparent to the organisation beyond Executives and senior
management, in a way that is meaningful and useful to the wider
workforce. Read more on page 112.
Illustrative visualisation sketch of the Severn Trent Academy
We’re excited that the new Severn Trent Academy will be up and
running in the 2020 calendar year, with our brand new syllabus being
launched in June and working towards the opening of our dedicated
learning facility later in the year. This will be a step change in the way
we provide training and development to our colleagues and is important
in ensuring our people continue to have the technical competence and
leadership skills they need now and in the future.
During the year the Remuneration Committee carried out its first
review of key remuneration elements, policies and processes by
employee group. We know it is important that our people are fairly
rewarded and this process gives the Committee oversight of wider
workforce pay and policies, as well as the opportunity to review them
to ensure they are designed to support the Company’s desired culture
and values. For example, page 103 outlines the steps we are taking
to align Executive Directors’ pension contributions with those of the
wider workforce.
Strong engagement
We want our people to be happy at work and were delighted with
this year’s QUEST engagement score of 8.1 out of 10, a performance
which was consistent across our Regulated Water and Waste Water,
and Business Services businesses, placing us in the top 5% of
Global Utilities. Our strongest performing area was our approach
to equality and inclusion. We feel that this really reflects our efforts
to create a culture where our people can be themselves, thrive and
feel supported.
We’re looking forward to launching a new annual engagement activity with
members of the Company Forum where the Chair of the Remuneration
Committee will share this year’s Remuneration Committee report.
Many of our people are also shareholders. 72% of Severn Trent’s
employees participate in our Sharesave scheme, with 24.5% of
participants saving the maximum of £500 per month compared with
9.9% across FTSE companies.
Enabling our people to grow
We are committed to supporting our people to grow, regardless
of the stage they are in their career, and this year we’ve run nearly
14,300 training days across the business. Over 10% of our workforce
responded to a survey telling us how they want to learn and what
works for them, we are using this feedback to ensure people go on
the right courses whilst developing innovative virtual reality and
e-learning solutions.
Our Glassdoor ranking has been consistently strong at four and
above (out of five) over the last year.
Extending to our supply chain
Our supply chain is also part of the Severn Trent community and
we continue to work closely with them to ensure our culture and
values are aligned. Through our Sustainable Supply Chain Charter
we encourage all suppliers to sign up to the same commitments
as ourselves; for example, in March we became an accredited real
Living Wage employer. This means we are committed to ensuring
that anybody who works with us receives the real Living Wage.
We are also keen to share where we have made good progress on
our inclusion journey with our supply chain partners. As founder
members of the Social Mobility Pledge, we ran a session as part of our
Corporate Social Responsibility Forum and encouraged our suppliers
to commit to actions which would enable them to sign up to the pledge.
We have a zero tolerance to modern slavery, and while we have had
no instances to date, we continue to improve our processes to protect
against it in our business and supply chain.
23
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information ENGAGEMENT WITH OUR STAKEHOLDERS
We are focused on driving long-term
sustainable performance for the
benefit of our customers, shareholders
and wider stakeholders.
This section provides some insight into how the Board
engages with our stakeholders to understand what
matters to them and further inform the Board’s
decision making and the actions taken as a consequence.
You can read more in our formal s.172 statement on
page 28, which sets out our approach to s.172 and
provides examples of decisions taken by the Board,
including how stakeholder views and inputs have
been considered in their decision making.
This section also includes high-level detail of
stakeholder engagement below Board level. The
principles underpinning s.172 are not something
that are only considered at Board level, they are
part of our culture. It is embedded in all that we do
and impacts on stakeholders are considered in the
business decisions we make across the Company,
at all levels, and strengthened by our Board setting
the right tone from the top. Pursuant to the Companies
Act, this information is incorporated by cross
reference in the Governance report on page 69.
The priorities of our stakeholders strongly influenced
the development of our new sustainability framework,
(see page 16). You can read more in our separately published
Sustainability Report which can be found on our website.
Six
half-day workshops were
held with our contract
managers, procurement
and construction project
managers
70%
of line managers trained
in mental health
230
of our employees
met our new Chair,
Christine Hodgson,
during her induction
R
E
D
L
O
H
E
K
A
T
S
Y
G
E
T
A
R
T
S
R
U
O
O
T
L
A
R
T
N
E
C
S
I
T
N
E
M
E
G
A
G
N
E
24
Severn Trent Plc Annual Report and Accounts 2020
CUSTOMERS
In serving our customers,
we want to provide both value
and a great experience. Our
consultation with customers
helped our 2020-25 Business
Plan to be fast-tracked by Ofwat.
COMMUNITIES
Our aim is to be a force for
good in the communities we
serve and, in doing so, create
value for all our stakeholders.
What matters to them
– Customer service and performance
– Leakage and supply reliability
– Affordability and value for money
– Assistance in times of need
– Responsible investment
What matters to them
– Operational impact and disruption
– Local employment
– Economic contribution
– Protection of the environment
How we engage at Board Level
– Board members attend our Customer Challenge Groups.
– Customer-shareholders engage with the Board and ask
questions at the AGM.
How we engage at Board Level
– We created our Community Fund for the benefit of good causes
in our region. The Board receives regular updates on the work
and priorities of the Fund.
– Customer Delivery performance is discussed at every
– Our Board undertook a number site visits centred on community
Board meeting.
– Customer perceptions of value for money reported at every
Corporate Sustainability Committee meeting.
and the environment, including:
– Wonderful Water Tour; and
– Agrivert.
– Extensive customer engagement in shaping our Business Plan.
– Employees who live and work in our communities meet the
Board at the Employee Forum, AGM and site visits.
– Corporate responsibility, community activities and volunteering
programmes are discussed at Board meetings.
– Environmental matters are regularly considered by the Board.
How we engage across the Company
– Quarterly meetings with CCW at management level.
– Frequent discussion and consultation with the 15,000
strong online customer community TapChat.
How we engage across the Company
– Our people volunteered through our Community Champions
programme, working to improve our communities and environment.
– We encourage every employee to spend at least two days a year
– Quarterly tracking of customer perceptions against key
of company time volunteering.
indicators including trust and satisfaction.
– Our people supported around 70,000 customers who
struggle to pay their bills, against an annual target of 50,000.
– We carried out 82,500 home water efficiency checks to help
customers manage their consumption since 2015.
– We installed circa 35,000 new water meters during the year.
– We created a new customer panel to oversee how our
Community Fund is distributed.
– We engaged with nearly 100,000 young people this year
through our Wonderful Water Tour and education activities.
– Our employability scheme inspires our people and makes
a real difference to people’s lives. Read more on page 21.
– Regular engagement with Government officials and elected
representatives on water and environment related issues.
– Our new Community Fund donates 1% of Severn Trent Water’s
profits over the next five years (over £10 million).
Link to our Business Model
Our customers and communities
Link to our Principal Risks
Risks 1 and 7
Link to our Business Model
Natural resources
Our customers and communities
Link to our Principal Risks
Risk 7
25
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information ENGAGEMENT WITH OUR STAKEHOLDERS
CONTINUED
SHAREHOLDERS
AND INVESTORS
Continued access to capital is vital
to the long-term performance of
our business. We work to ensure
that our shareholders, investors
and investment analysts have
a strong understanding of our
strategy, performance, ambition
and culture.
Many of our shareholders are
also customers, employees
and pensioners.
EMPLOYEES
Our greatest asset is our
experienced, diverse and
dedicated workforce. Our
relationship with them is
open and honest, and they
are appropriately supported,
developed and rewarded to
be their best in all that they do.
What matters to them
– Strategy and business model
– Financial performance and returns
– Reputation
– Sustainability performance
– Financial risk management
– Strong leadership
What matters to them
– Health, safety and wellbeing
– Diverse and inclusive workplace
– Opportunities to reach full potential
– Open and honest environment
– Fair pay and reward
How we engage at Board Level
– Full Board attendance at the 2019 AGM.
– Board approves the half year and full year results and attends
results presentations.
– Board approves the Annual Report and Accounts.
– The Chair, SID, CEO, CFO and Non-Executive Directors attend
investor meetings and feedback is reported to the Board.
Read more on page 77.
– Investor roadshows in the UK and Australia, US, Canada and
Europe. The Head of Investor Relations gives an update to the
Board on a regular basis.
– Investor Relations Strategy discussed by the Board.
– The Chair attends the Capital Markets Day.
How we engage at Board Level
– Employee shareholders have the opportunity to meet the
Board and ask questions at the AGM.
– The Chair, Non-Executive and Executive Directors attend the
Employee Forum and feedback at Board meetings.
– Company purpose and culture, talent development and people
strategy are discussed at Board meetings.
– Remuneration Committee reviews workforce policies and
practices and makes recommendations to the Board.
– Board considers QUEST survey results and steps taken to
address feedback.
– Directors meet employees at site visits, both during and
outside of the Board meeting calendar, including at our
Llwyn Onn Water Treatment Works where they observed water
treatment processes first-hand and met the teams involved.
How we engage across the Company
– Our employees hosted a shareholder site visit during the
year at Spernal.
– Numerous shareholder site visits during the year so they
can experience our operations and culture first hand.
– Regular dialogue with shareholders to support them
in their investments.
How we engage across the Company
– 70% of line managers trained in mental health.
– In addition to Board attendance, our Company Forum brings
together around 20 employee representatives at quarterly
meetings, including union representatives.
– Employee engagement survey ranked us in the top 5% of utility
companies globally this year.
– Our people discussed matters of importance with
– All employee CEO roadshow, ‘Journey to Patagonia’, launched
shareholders at our AGM.
in March 2020.
– A large number of employees were engaged in developing our
new Purpose and Values.
Link to our Business Model
Financial capital
Link to our Principal Risks
Risks 9 and 10
26
Link to our Business Model
Our people and culture
Link to our Principal Risks
Risk 7
Severn Trent Plc Annual Report and Accounts 2020 SUPPLIERS AND
CONTRACTORS
Along with our employees, our
suppliers support us in delivering
for our customers. Strong supplier
relationships ensure sustainable,
high quality delivery for the
benefit of all stakeholders.
REGULATORS
AND
GOVERNMENT
The policy framework for the
water sector in England and Wales
is set by the English and Welsh
Governments respectively. We
seek to engage constructively and
proportionally with Government
to achieve the best outcomes for
customers and the environment.
Below the policy framework,
our industry is regulated by
Ofwat and others. We agree
commitments with our regulators
and continually report our
performance against these.
We work closely with our regulators
to shape our industry to help ensure
the right outcomes for customers
and the environment.
What matters to them
– Fair engagement and payment terms
– Collaboration
– Responsible supply chain
What matters to them
– Outcomes for customers, the environment and long-term resilience
– Performance against regulatory targets
– Trust and transparency
– Governance and compliance
– Environmental impact
How we engage at Board Level
– Commercial performance is discussed at every Board meeting,
including an update on relationships with suppliers.
– Members of the Board visited the site of our largest capital project,
the Birmingham Resilience Programme, to observe progress
first-hand, meet the teams and suppliers / contractors involved.
– Our Chair met with key suppliers as part of her induction.
– Supplier representatives attend the Capital Markets Day and
the Employee Forum alongside Executive Directors and
Non-Executive Directors.
– Our Corporate Sustainability Committee regularly monitors
progress on sustainability in our supply chain.
How we engage at Board Level
– To deepen Board level understanding of our Regulators,
our Chair and Non-Executive Directors formally met with
Ofwat five times during the year.
– Regulatory matters are regularly considered by the Board,
including PR19 plans, Water Resources Management Plan
and Scheme of Wholesale Charges.
– Regulatory stakeholders attend Board meetings and dinners,
including from Ofwat, the Drinking Water Inspectorate (‘DWI’),
the Environment Agency (‘EA’) and the Consumer Council for
Water (‘CCW’).
– Regulatory consultation updates are considered by the Board.
How we engage across the Company
– Regular meetings with our suppliers, including training on
modern slavery, and Doing the Right Thing.
– Six half-day workshops were held with our contract managers,
procurement and construction project managers.
– Sustainable Supply Chain Charter.
– We are committed to payment practices reporting and for the
period ending 31 March 2020, the average time to pay was 29 days.
How we engage across the Company
– Regular meetings with our regulators at management level
including, EA, Natural England, Ofwat, DWI and Defra.
– Regular engagement with Government officials and elected
representatives on water and environment related issues.
Link to our Business Model
Physical assets
Our suppliers and partners
Link to our Principal Risks
Risks 9 and 10
Link to our Business Model
Our regulators
Link to our Principal Risks
Risks 2, 3 and 5
27
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information SECTION 172 STATEMENT
SECTION 172
STATEMENT
The principles underpinning s.172 are not something that are only considered
at Board level, they are part of our culture. It is embedded in all that we do as a
company. The differing interests of stakeholders are considered in the business
decisions we make across the Company, at all levels, and are reinforced by our
Board setting the right tone from the top.
SOCIAL TARIFFS AND PRIORITY
SERVICES FOR CUSTOMERS
Section 172 Considerations
Consideration of s.172 impacts
by the Board in its decision making
The Board invited the Consumer Council for Water
(‘CCW’) to attend the October 2019 Board meeting to receive
direct observations on the Company’s performance from
CCW’s perspective. The Board considered the feedback
from CCW in relation to Severn Trent’s improved customer
engagement and the trends in awareness of social tariffs
and priority services.
Customers
The Board carefully considered CCW’s views on awareness
of social tariffs and priority services and discussed water
poverty in the region and vulnerable customers. Additional
customer insight was gained from our CCGs and direct
customer feedback received by management and the Board.
Regulator: CCW
The CEO provided feedback to the Board following a
half day meeting with the CEO and Chairman of CCW,
where they had discussed progress made on supporting
vulnerable customers and the new stretching targets set
by the Company.
Workforce
Our workforce places a high emphasis on Severn Trent’s
contribution to society as a whole, including the work we do
to support vulnerable customers. This was highlighted and
considered by the Board through the annual QUEST survey
and in direct discussion with employees at the Company
Forum. Ensuring that our workforce is proud and inspired
to work for Severn Trent is a key consideration for the Board.
Outcomes and Actions
The Board agreed that an update on the AMP7 strategy
in respect of social tariffs and priority services should
be considered further by the Corporate Sustainability
Committee, with an update being provided to the Board
on this important topic.
We supported around 70,000 customers who struggle to
pay their bills, against an annual target of 50,000. We have
carried out 82,500 home water efficiency checks to help
customers manage their consumption since 2015 and
installed circa 35,000 water meters during the year.
Our s.172 Approach
Stakeholder engagement is central to the formulation and execution of our strategy
and is critical in achieving long-term sustainable success. The needs of our different
stakeholders as well as the consequences of any decision in the long term are
well-considered by the Board. It is not always possible to provide positive outcomes
for all stakeholders and the Board sometimes has to make decisions based on the
competing priorities of stakeholders. Our stakeholder engagement processes enable
our Board to understand what matters to stakeholders and carefully consider all the
relevant factors and select the course of action that best leads to the high standards
of business conduct and success of Severn Trent in the long term. Our approach
to s.172 is set out below and provides examples of decisions taken by the Board and
how stakeholder views and inputs as well as other s.172 considerations have been
considered in its decision making.
Leadership and management receive
training on Directors’ duties to ensure
awareness of the Board’s responsibilities
Board papers include a table setting out
s.172 factors and relevant information
relating to them
Our Board continually engages with
stakeholders. Read more on page 24
BOARD INFORMATION
s.172 factors considered in the Board’s
discussions on strategy, including how they
underpin long-term value creation and the
implications for business resilience
Group’s culture helps ensure that there
is proper consideration of the potential
impacts of decisions
BOARD STRATEGIC DISCUSSION
Chair ensures decision making is
sufficiently informed by s.172 factors
The Board performs due diligence in
relation to the quality of the information
presented and receives assurance
where appropriate
BOARD DECISION
Outcomes of decisions assessed
and further engagement and dialogue
with stakeholders
Actions taken as a result of
Board engagement
28
TECHNICAL SKILLS DEVELOPMENT
AND THE SEVERN TRENT ACADEMY
AMP7 DIVIDEND POLICY
DRINKING WATER QUALITY
Section 172 Considerations
Section 172 Considerations
Section 172 Considerations
Consideration of s.172 impacts
by the Board in its decision making
Consideration of s.172 impacts
by the Board in its decision making
Consideration of s.172 impacts
by the Board in its decision making
The Board carefully considered the Academy and
The Board carefully considered the impact of the
The Board invited the Drinking Water Inspectorate
the role of the Company in developing the right
dividend policy on key stakeholders, including
(the ‘DWI’) to attend the November 2019 Board
skills for the future to support delivery of the Group’s
Ofwat (with a focus on customer considerations),
meeting to receive direct feedback on the Company’s
performance commitments and contribution to wider
shareholders, debt investors, our workforce and
performance from the DWI’s perspective as it does
society. The impact of the Company’s operations
pensioners (in liaison with the Pension Scheme Trustee).
every year.
in the community and the positive role it could play
in the promotion of social mobility, training and
employment were pivotal to the Board’s decision.
Workforce
Regulator (Ofwat) and Customers
Customers
A key requirement in AMP7 is that all companies
The Board considered carefully the DWI’s views on
can explain their dividend policy, how it is in
the Company’s commitment to water quality, noting
customers’ interests and outline any consequences
the improvements which have been made over the
Employees will be able to easily access the learning
on bill profiles and regulatory gearing. The Board
last five years and the areas of continued focus.
they need, and navigate clear career paths where
determined that an affordable and sustainable
Additional customer insight was gained from our
they aspire to develop further. Engaging and
dividend was important for the long-term success
CCGs, and direct customer feedback received by
retaining our workforce was a key consideration
of the Company, maintained the expected levels
management and the Board.
for the Board. The Board also considered the high
of regulatory gearing and considered the expectations
emphasis that the workforce place on training and
of shareholders and pensioners, with funds invested
Regulator: DWI
development, identified through the annual QUEST
in Severn Trent.
survey and in direct discussion with employees at
Shareholders
the Company Forum.
Engagement with investors provided useful insight
notices and positive outcomes delivered for stakeholders.
The DWI’s Chief Inspector provided feedback
to the Board in relation to Severn Trent’s improved
performance in closing down DWI recommendations and
Workforce
Our workforce places a high emphasis on opportunities
for growth, development and rewarding careers. The
DWI outlined that the Severn Trent Academy was a very
positive development in achieving this and presented
an opportunity to promote the awareness of water
quality regulations in training courses.
Outcomes and Actions
The Board agreed it would receive DWI specific
performance updates moving forward and that
these would cover DWI focus areas, including:
responses to customer feedback; long-term
security of supply chain for chemicals; water
discolouration issues; contractor management;
and risk assessment methodologies.
The Board agreed that the Academy’s syllabus
would include water quality regulations.
Long-term Success of the Company
Developing the right skills for the future is key
to ensuring that the Company can deliver its
performance commitments in the long-term
and mitigate the emerging risk identified through
our ERM process in relation to shortage of STEM
expertise within the labour market and future
talent pipelines.
Environment and the Community
Engagement with the community on the proposed
location for our Academy building, including local
customers and schools. The building specification is
targeting a BREEAM (Building Research Establishment
Environmental Assessment Method) standard of
‘Very Good’.
Suppliers, Customers and Other Stakeholders
(including Regulators)
The Academy will foster positive relationships
between suppliers, customers and other stakeholders,
including public and not-for-profit organisations such
as the Ministry of Defence and Fire Service. Conferencing
space will be offered to SMEs and local suppliers in
our region at cost as well as our regulators – Ofwat,
DWI and the EA.
We are a signatory to the Prompt Payment Code
(‘PPC’) and only work with organisations who
respect our Sustainable Supply Chain Charter.
Outcomes and Actions
The Board agreed that the next stage of the Group’s
strategy would involve the development of a suite
of skills based training and the utilisation of new
technology in delivering training.
on their expectations, as follows: No cut to dividend
in the transition from 2019/20 to 2020/21; Growth
in the dividend linked to inflation; and a preference
for sustainable ordinary dividends.
The proposed dividend policy satisfied these
priorities and the Board considered it to be in
line with investor expectations.
Debt Investors
Debt investors’ expectations were focused on the
impact of the dividend policy on credit metrics. The
Board determined that an affordable and sustainable
dividend was important for the long-term success
of the Company and maintained the target levels of
credit metrics.
Pensioners (through liaison with the Pension
Scheme Trustees)
We engaged with the Pension Trustee throughout the
first half of the year, as part of the triennial valuation
process. The Trustee’s expectation on dividends,
including the preference for sustainable ordinary
dividends and deficit repair contributions had been
agreed (over £50 million per annum) with a resultant
higher ratio of dividends to repair payments for AMP7.
Workforce
Many of our colleagues are shareholders, either directly
through our share plans, such as Sharesave – which
over 72% of our employees participate in – or indirectly
through private pensions, FTSE index trackers or other
investments. The Board determined that an affordable
and sustainable dividend was important for the
long-term success of the Company and considered
the expectations of the many employee shareholders
and pensioners, with funds invested in Severn Trent.
Outcomes and Actions
The Board reached the decision that it was in the
Company’s best, long-term interest to approve and
announce the AMP7 dividend policy, with a growth
rate of at least CPIH.
Continual dialogue will be maintained with Ofwat,
shareholders, debt investors, pensioners and
customers on this important topic.
Severn Trent Plc Annual Report and Accounts 2020
Key
Read more:
likely consequences of decisions in the long term
the interests of the Company’s workforce
the need to foster relationships with suppliers, customers and others
impact of operations on the community and environment
high standards of business conduct
the need to act fairly between members of the Company
– Stakeholder Engagement p.24
– Matters Reserved to the Board
– Culture
– Values
p.20
– Committee Terms of Reference
p.20
– Doing the Right Thing
s.172 reflected in
our governance
documentation:
www.severntrent.com
Consideration of s.172 impacts
by the Board in its decision making
The Board invited the Consumer Council for Water
(‘CCW’) to attend the October 2019 Board meeting to receive
direct observations on the Company’s performance from
CCW’s perspective. The Board considered the feedback
from CCW in relation to Severn Trent’s improved customer
engagement and the trends in awareness of social tariffs
and priority services.
Customers
The Board carefully considered CCW’s views on awareness
of social tariffs and priority services and discussed water
poverty in the region and vulnerable customers. Additional
customer insight was gained from our CCGs and direct
customer feedback received by management and the Board.
Regulator: CCW
The CEO provided feedback to the Board following a
half day meeting with the CEO and Chairman of CCW,
where they had discussed progress made on supporting
vulnerable customers and the new stretching targets set
by the Company.
Workforce
Our workforce places a high emphasis on Severn Trent’s
contribution to society as a whole, including the work we do
to support vulnerable customers. This was highlighted and
considered by the Board through the annual QUEST survey
and in direct discussion with employees at the Company
Forum. Ensuring that our workforce is proud and inspired
to work for Severn Trent is a key consideration for the Board.
Outcomes and Actions
The Board agreed that an update on the AMP7 strategy
in respect of social tariffs and priority services should
be considered further by the Corporate Sustainability
Committee, with an update being provided to the Board
on this important topic.
We supported around 70,000 customers who struggle to
pay their bills, against an annual target of 50,000. We have
carried out 82,500 home water efficiency checks to help
customers manage their consumption since 2015 and
installed circa 35,000 water meters during the year.
SOCIAL TARIFFS AND PRIORITY
SERVICES FOR CUSTOMERS
Section 172 Considerations
TECHNICAL SKILLS DEVELOPMENT
AND THE SEVERN TRENT ACADEMY
AMP7 DIVIDEND POLICY
DRINKING WATER QUALITY
Section 172 Considerations
Section 172 Considerations
Section 172 Considerations
Consideration of s.172 impacts
by the Board in its decision making
Consideration of s.172 impacts
by the Board in its decision making
Consideration of s.172 impacts
by the Board in its decision making
The Board carefully considered the Academy and
the role of the Company in developing the right
skills for the future to support delivery of the Group’s
performance commitments and contribution to wider
society. The impact of the Company’s operations
in the community and the positive role it could play
in the promotion of social mobility, training and
employment were pivotal to the Board’s decision.
Workforce
Employees will be able to easily access the learning
they need, and navigate clear career paths where
they aspire to develop further. Engaging and
retaining our workforce was a key consideration
for the Board. The Board also considered the high
emphasis that the workforce place on training and
development, identified through the annual QUEST
survey and in direct discussion with employees at
the Company Forum.
Long-term Success of the Company
Developing the right skills for the future is key
to ensuring that the Company can deliver its
performance commitments in the long-term
and mitigate the emerging risk identified through
our ERM process in relation to shortage of STEM
expertise within the labour market and future
talent pipelines.
Environment and the Community
Engagement with the community on the proposed
location for our Academy building, including local
customers and schools. The building specification is
targeting a BREEAM (Building Research Establishment
Environmental Assessment Method) standard of
‘Very Good’.
Suppliers, Customers and Other Stakeholders
(including Regulators)
The Academy will foster positive relationships
between suppliers, customers and other stakeholders,
including public and not-for-profit organisations such
as the Ministry of Defence and Fire Service. Conferencing
space will be offered to SMEs and local suppliers in
our region at cost as well as our regulators – Ofwat,
DWI and the EA.
We are a signatory to the Prompt Payment Code
(‘PPC’) and only work with organisations who
respect our Sustainable Supply Chain Charter.
Outcomes and Actions
The Board agreed that the next stage of the Group’s
strategy would involve the development of a suite
of skills based training and the utilisation of new
technology in delivering training.
The Board carefully considered the impact of the
dividend policy on key stakeholders, including
Ofwat (with a focus on customer considerations),
shareholders, debt investors, our workforce and
pensioners (in liaison with the Pension Scheme Trustee).
The Board invited the Drinking Water Inspectorate
(the ‘DWI’) to attend the November 2019 Board
meeting to receive direct feedback on the Company’s
performance from the DWI’s perspective as it does
every year.
Customers
The Board considered carefully the DWI’s views on
the Company’s commitment to water quality, noting
the improvements which have been made over the
last five years and the areas of continued focus.
Additional customer insight was gained from our
CCGs, and direct customer feedback received by
management and the Board.
Regulator: DWI
The DWI’s Chief Inspector provided feedback
to the Board in relation to Severn Trent’s improved
performance in closing down DWI recommendations and
notices and positive outcomes delivered for stakeholders.
Workforce
Our workforce places a high emphasis on opportunities
for growth, development and rewarding careers. The
DWI outlined that the Severn Trent Academy was a very
positive development in achieving this and presented
an opportunity to promote the awareness of water
quality regulations in training courses.
Outcomes and Actions
The Board agreed it would receive DWI specific
performance updates moving forward and that
these would cover DWI focus areas, including:
responses to customer feedback; long-term
security of supply chain for chemicals; water
discolouration issues; contractor management;
and risk assessment methodologies.
The Board agreed that the Academy’s syllabus
would include water quality regulations.
Regulator (Ofwat) and Customers
A key requirement in AMP7 is that all companies
can explain their dividend policy, how it is in
customers’ interests and outline any consequences
on bill profiles and regulatory gearing. The Board
determined that an affordable and sustainable
dividend was important for the long-term success
of the Company, maintained the expected levels
of regulatory gearing and considered the expectations
of shareholders and pensioners, with funds invested
in Severn Trent.
Shareholders
Engagement with investors provided useful insight
on their expectations, as follows: No cut to dividend
in the transition from 2019/20 to 2020/21; Growth
in the dividend linked to inflation; and a preference
for sustainable ordinary dividends.
The proposed dividend policy satisfied these
priorities and the Board considered it to be in
line with investor expectations.
Debt Investors
Debt investors’ expectations were focused on the
impact of the dividend policy on credit metrics. The
Board determined that an affordable and sustainable
dividend was important for the long-term success
of the Company and maintained the target levels of
credit metrics.
Pensioners (through liaison with the Pension
Scheme Trustees)
We engaged with the Pension Trustee throughout the
first half of the year, as part of the triennial valuation
process. The Trustee’s expectation on dividends,
including the preference for sustainable ordinary
dividends and deficit repair contributions had been
agreed (over £50 million per annum) with a resultant
higher ratio of dividends to repair payments for AMP7.
Workforce
Many of our colleagues are shareholders, either directly
through our share plans, such as Sharesave – which
over 72% of our employees participate in – or indirectly
through private pensions, FTSE index trackers or other
investments. The Board determined that an affordable
and sustainable dividend was important for the
long-term success of the Company and considered
the expectations of the many employee shareholders
and pensioners, with funds invested in Severn Trent.
Outcomes and Actions
The Board reached the decision that it was in the
Company’s best, long-term interest to approve and
announce the AMP7 dividend policy, with a growth
rate of at least CPIH.
Continual dialogue will be maintained with Ofwat,
shareholders, debt investors, pensioners and
customers on this important topic.
29
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information
ACHIEVING OUR AMP6 STRATEGIC OBJECTIVES
ACHIEVING OUR AMP6
STRATEGIC OBJECTIVES
EMBED CUSTOMERS
AT THE HEART OF ALL WE DO
DRIVE OPERATIONAL EXCELLENCE
AND CONTINUOUS INNOVATION
We’ll improve the way in which
customers engage with us through
improved insight and understanding
of what’s important to them.
We’ll build a smarter water and waste
water network, develop our business
intelligence and simplify our cross
business processes.
Areas of focus for 2019/20
– Retaining our strong performance on
waste, while making improvements
on retail and water service.
– Delivering our environmental
commitments including on
the Water Framework Directive
and biodiversity.
– Retain a minimum of targeted
assurance and all measures
assessed as ‘minor amends’ or above.
– Sharing best practice with other
companies so all customers across
England and Wales can benefit from
the improvements we’ve delivered in
our region on external sewer flooding.
Our progress in 2019/20
– While we have had a challenging year
in some areas of waste performance
including sewer flooding (which was in
part impacted by prolonged periods of
severe weather), we have continued to
drive improvements in our water service
in particular with a number of areas of
investment focus now translating into
improvements for customers.
– We have outperformed both our Water
Framework Directive and biodiversity
commitments, improving 1,600 km of
river across our region, and improving
224 hectares of biodiversity in SSSIs
in to favourable condition. This helps
to make an important contribution to
our region’s natural environment.
– While Ofwat no longer assesses
the quality of companies’ assurance
processes, we have continued to
build and improve our tried and
tested risk-based approach
throughout the year.
Areas of focus for 2019/20
– Providing a service that is affordable
for all and support our financially
vulnerable customers.
– Maintaining the lowest bills in England
(Severn Trent Water) and Wales
(Hafren Dyfrdwy).
– Delivering on the things that matter
most to our customers as measured
by customer ODIs.
– Further improving our incident
management capability to ensure we
can maintain an uninterrupted supply
of clean water to our customers.
Our progress in 2019/20
– We continued to offer a range of support
options to our financially struggling
customers, with some 70,000 this year
benefitting. This is an increase from
previous years and puts us in a great
place to deliver the commitments next
year. As in previous years we donated
£3.5 million to the Severn Trent Trust
Fund – an independent charity that
supports people in financial need
across our region.
– Severn Trent Water continued to
offer the lowest bills in England and
Hafren Dyfrdwy the lowest bills in
Wales. Both companies will continue
to offer some of the lowest bills
throughout AMP7.
– Further year-on-year improvements
in measures that matter to customers
like supply interruptions, water quality
complaints and leakage whilst
completing our multi-year investment
programmes that deliver significant
environmental benefit.
– Our new Network Response team
is enabling us to respond more
quickly and effectively when our
customers are affected by issues
like supply interruptions.
In our 2019 Annual Report and Accounts
we outlined our areas of focus for 2019/20
against our five strategic priorities. In this
final year of our current business planning
period (Asset Management Period 6 or
‘AMP6’), we update on the further progress
we have made.
As explained in our CEO’s review on page 14,
during the year we decided to move away
from our previous strategic framework and
place our Purpose, ‘Taking care of one of life’s
essentials’, at the heart of our strategy. Our
Business Plan outcomes set out our priorities
for the next five years of AMP7 and we have
structured our Performance review on pages
38 to 49 around these outcomes to enable
consistency as we move into the new AMP.
BUILDING BLUE GREEN FLOOD-RISK
INFRASTRUCTURE IN PARTNERSHIP
Flooding can be very distressing
for customers, but the causes are
often complex and require different
responsible authorities working
together to find a solution.
Severn Trent Water has worked with
Nottingham City Council and a range
of funding partners to tackle flood risk
in the Day Brook area of the city. In this
Nottingham City Council led multi-faceted
scheme, nature-based solutions twinned
with capital investment were used to not
only reduce the risk of flooding for 160
properties in the area, but also boost
biodiversity and create new green spaces
for the local community to use.
Severn Trent Water’s contribution included
the refurbishment of an existing pumping
station and ponds which created new
capacity and resilience, as well as
facilitating the diversion of existing sewer
outfalls to allow the re-naturalisation of
a river channel – enhancing amenity,
aesthetics and biodiversity of the area.
The experience we are gaining through
this mode of partnership working to
deliver multiple benefits, will be an
important part of our approach to
flood risk during AMP7.
30
Severn Trent Plc Annual Report and Accounts 2020 INVEST RESPONSIBLY FOR
SUSTAINABLE GROWTH
CHANGE THE MARKET
FOR THE BETTER
CREATE AN AWESOME
PLACE TO WORK
We’ll develop an effective strategy
which optimises our regulated asset
base whilst creating new growth
opportunities for the future.
We’ll embrace the market opening
in the UK and explore opportunities
for growth in new water markets.
We’ll create a culture of empowerment
and accountability with a focus on skills,
talent and career development.
Areas of focus for 2019/20
– Promoting a more sustainable way of
working which looks beyond traditional
end-of-pipe solutions (including our
partnership working and sustainable
sewage treatment commitments).
– Developing the World Water Innovation
Fund to help find new ways of working
and to leave a lasting water legacy for
future generations.
– Continuing to progress our understanding
of the impact of climate change on our
long-term service delivery, using the UK
Climate Projections 2018 published by the
Met Office.
Our progress in 2019/20
– We have outperformed our target
for partnership working on flooding,
completing 26 schemes over the AMP
and have delivered two innovative
approaches to improve sewage
treatment capacity – setting new
precedents for sustainable ways of
working in AMP7. This includes being
the first waste treatment company in
Europe to pioneer the technology.
– The World Water Innovation Fund
continues to go from strength to
strength, with two new members joining
this year and seven live trials underway.
– Following the publication of the latest
climate scenarios (UKCP18), we have
updated our future water resource
scenarios and are on track to deliver our
next report on climate change adaption
to Defra in the Autumn of 2020.
Areas of focus for 2019/20
– Working progressively with Ofwat
to finalise the PR19 outcome.
– Delivering our ambition of 50%
self-generation.
– Progressing the development of regional
water trading solutions, including the
North to South interconnector.
Areas of focus for 2019/20
– Delivering an improvement in
our safety performance through
focused interventions.
– Maintaining our commitment to
the wellbeing of our colleagues.
– Continuing to implement improvements
identified by our QUEST engagement.
– Developing an exciting and innovative
syllabus for our new Training Academy.
Our progress in 2019/20
– We continued to work with Ofwat as
it concluded the PR19 process and
formally accepted the outcome in
January and February 2020 for both
our licensed companies.
– At 51%, we exceeded our ambition of
generating the equivalent of 50% of our
energy needs. We’ve also delivered the
first of our commitments from the Triple
Carbon Pledge with 100% of our energy
coming from renewable sources.
– We continued to progress development
of the North to South interconnector
and welcomed the inclusion of these
important feasibility stages in Ofwat’s
final PR19 decisions.
Our progress in 2019/20
– We have continued to focus on colleague
health, safety and wellbeing. In each
quarter of the year we have focused on
one of the four key hazards that causes
the most harm and have seen success
in this approach with a 25% reduction
in all driving accidents from the
preceding nine months.
– We’re constantly looking at new and
innovative ways of raising awareness
and delivering training such as virtual
reality manual handling.
– We continue to provide mental health
awareness training.
– We’ve continued to implement feedback
identified by our QUEST engagement
and have seen like-for-like engagement
scores go up from 62% to 71% in the
year. For example, we’ve made our
pay and reward structure much more
transparent we’ve also built on our
work on diversity and inclusion with the
continued growth of our Allies programme.
– We have made significant progress in
the development of our new, immersive,
learning solutions using virtual reality
capability. This will be a vital complement
to our hands-on technical and experiential
skills training in the new training Academy.
31
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information KEY PERFORMANCE INDICATORS
KEY PERFORMANCE
INDICATORS
The Key Performance Indicators (KPIs)¹ set out below represent
financial and non-financial measures which we will use from this
year, and throughout the next regulatory period (2020-25), to track
our performance as we deliver our Purpose and the Business Plan
outcomes we have committed to our customers and communities.
A COMPANY YOU CAN TRUST
LOWEST POSSIBLE BILLS
8.1
0.3
7.5
9%
improvement
0.2
33%
improvement
63
66
3%
improvement
2018/19
2019/20
2018/19
2019/20
2018/19
2019/20
Employee engagement (Score out of 10)
Lost time incidents (per 100,000 hours worked)
This year we introduced a new employee
engagement survey which saw an amazing
92% of our colleagues giving feedback.
We had a fantastic level of engagement with
Severn Trent scoring 8.1 and Hafren Dyfrdwy
8.0 out of 10. Year-on-year this is around a
9% improvement.
The results put us in the upper quartile
of all companies in the UK and, even better,
in the top 5% of utilities across the world.
We strive to ensure that all of our colleagues
can return home safely at the end of the day.
The aim is always Goal Zero, bringing the
number of colleagues who are unable to
work because of injuries down to zero.
Despite one of our biggest years of capital
investment, and some of the most difficult
operating conditions on our networks, we’ve
seen a 33% improvement year-on-year.
But this isn’t the end of our journey to Goal
Zero and we’ll continue to make changes to
our approach and behaviours to ensure all
of our colleagues return home safely at the
end of the day.
Value for money 2 (Percentage)
For the last decade we’ve had the lowest
bills in the industry – and in 2019/20 we had
the lowest bills in both England and Wales.
But low bills don’t always mean we’re
considered as offering value for money.
This metric tracks our customers’ opinions
of the service we offer through quarterly
surveys, undertaken by independent
experts. Value for money is a combination
of the bill level, the customers’ perception
of the service they receive and the way we
contribute to wider society. This year we’ve
seen a 3% improvement in this metric, and
a huge 9% improvement over the last five
years. We’re committed to continue to
measure value for money until at least 2025.
A POSITIVE DIFFERENCE
A SERVICE FOR EVERYONE
2,035
1,520
25%
improvement
185,371
140,916
52,547
24%
less
33%
improvement
69,722
50,133
37,487
34%
improvement
2018/19
2019/20
2018/19
2019/20
2018/19
2019/20
2018/19
2019/20
Public sewer flooding 2 (No. incidents)
Education Programme (No. of people reached)
Help When You Need It 2 (No. of customers)
This year we have introduced a new measure
for our customers in England which expands
our coverage of sewer flooding to include
public open spaces and highways. We believe
we are the first water company in England
to measure sewer flooding in this way.
We introduced the measures following
feedback from our customers who told us
to look more at our wider impact on society
and seek ways to address this.
This is the first year we have focused our
activities on this area and we’ve seen a 25%
reduction year-on-year.
Our performance has remained on track
against our ODI targets for 2018/19 and
2019/20, and we exceeded our five-year
target by more than 15%.
We also introduced our more immersive
Wonderful Water Tour in 2019/20 that is
targeted at Key Stage 2 children in schools.
It was introduced in preparation for the new
AMP7 ODI target that measures the number
of behaviour commitments instead of
number of engagements.
The number of engagements has
decreased slightly year-on-year because
the Wonderful Water Tour is more in-depth
and resource intensive.
Sometimes our customers need our help
to balance their bills – when they do we
offer a wide range of support schemes
which are collectively measured by our
‘Help when you need it’ indicator.
Our help includes payment matching,
payment holidays, bill reviews and the
Severn Trent Trust Fund. Each scheme is
designed to meet the needs of different
customers and their unique challenges.
We aim to significantly expand the scheme
further over the next five years and we have
made an early start this year, as seen by
an increase in the number of customers
helped by 33%.
Priority Services Register (PSR) 2
(No. of customers)
We understand that our vulnerable
customers need more support and help
in different ways and we make sure we
understand how to do this most effectively
using our Priority Services Register (‘PSR’).
We are working with colleagues in the energy
sector to share PSR data in order to increase
our awareness of vulnerability within our
region, and continue to run social media and
bespoke campaigns to highlight our services
to all of our customers.
During the last year we have grown our
PSR by over 12,600 customers to 1.2% of
our customer base. Over the next five years
we are looking to increase this further and
support over 400,000 customers by 2025.
AN OUTSTANDING EXPERIENCE
Direction
of
improvement
12
9
GOOD TO DRINK
8.4
11,856
10,181
c40%
improvement
expected
14%
improvement
Severn Trent
2019/2020
Hafren Dyfrdwy
2018/19
2019/20
2018/19
2019/20
Customer Measure of Satisfaction (Index)
Developer Measure of Satisfaction (Index)
Compliance Risk Index 2 (Index)
Drinking water quality 2 (No. of complaints)
For 2020/21, Ofwat has introduced a new
measure of satisfaction for customers.
It combines both quantitative performance
metrics and a qualitative element based
on customer surveys.
The metric is reported as an index out of 100,
with financial incentives based on our
relative position to the median company
and the frontier or laggard company.
The measures has been run as a shadow
measure for 2019/20 and we expect
to outturn around the median for
Severn Trent Water.
For 2020/21 Ofwat has introduced a new
measure of satisfaction for developers.
It combines both quantitative performance
metrics and a qualitative element based
on customer surveys.
The metric is reported as an index out of
100, with financial incentives based on our
relative position to the median company
and the frontier or laggard company.
The measures has been run as a shadow
measure for 2019/20 but the final position
has not yet been confirmed. However, we
expect to outturn in the upper quartile
for the industry.
The Compliance Risk Index (CRI) is the new
measure of water quality as measured by the
Drinking Water Inspectorate. It has replaced
the previous measure, mean zonal
compliance (MZC).
Our final position in England for 2019/20 has
not yet been confirmed, however, we expect to
see around a 40% improvement year-on-year.
This improvement has been driven by an
end-to-end review of our process to identify
and remove higher risk points of failure.
Where we do have issues, we also ensure
our response is robust to protect customers
and learn lessons for the future.
Over the past five years we have been
transforming our approach to improve
the quality of our water’s appearance,
taste and odour. This measure focuses
on the number of complaints we receive
from our customers in line with the Drinking
Water Inspectorate’s reporting.
We’ve seen a fantastic 14% improvement
in the year, this is in addition to the 18%
improvement we’ve already seen over the
last two years. Much of the improvement
is a result of the improved cleansing and
flushing programme as well as improved
raw water quality.
We haven’t quite delivered the standards
our customers expect this AMP, so we’re
retaining this measure until at least 2025.
32
Severn Trent Plc Annual Report and Accounts 2020
WATER ALWAYS THERE
19.06
OUR FINANCIAL KPIs
420
401
£573.6m
£570.3m
145.8p
146.0p
61%
improvement
7.30
4%
improvement
0.6%
decrease
0.1%
increase
2018/19
2019/20
2018/19
2019/20
2018/19
2019/20
2018/19
2019/20
Supply interruptions2 (No. of minutes)
Leakage2 (Megalitres per day)
Delivering a continuous supply of water is
what we do. We measure this by tracking the
number of minutes, on average, a customer
is without water each year. This includes
all interruptions that last more than three
hours no matter the cause.
Over the past 12 months we’ve transformed
our approach for our customers in England,
which has resulted in more than a 60%
year-on-year improvement. We’ve calmed
the network to reduce the risk of bursts,
innovated with new technology to speed
up repairs and expanded our fleet allowing
us to respond in a more agile way.
We’re ambitious and aim to reduce the
measure to five minutes or less by 2025.
Leakage is one of our most important
measures – how we perform can greatly
influence our customers’ perception of us.
We report leakage as the average volume
of water we lose from the network each day.
Over the last five years we had a commitment
to reduce leakage by 6% in our English
operating area. In the last year alone we’ve
reduced leakage by 4%, resulting in a
fantastic 10% reduction over the period.
Our approach has included a mix of increased
monitoring, improved data analytics and
innovative approaches including satellite
technology. But we’re not stopping there,
we’re committed to deliver at least another
15% reduction over the next five years.
Group underlying PBIT3
Group underlying EPS3
Group underlying profit before interest and
tax (‘underlying PBIT’) is a measure of the
profit generated by the Group’s operations
excluding distortions caused by large and
unusual income or costs that are classified
as exceptional items. Commentary on the
performance in the year is set out in the
CFO’s review on page 51.
Earnings per share (‘EPS’) is a key financial
metric that indicates the Group’s profitability
after finance costs and tax. Underlying EPS
excludes distorting factors such as exceptional
gains and losses and accounting adjustments
for gains and losses on valuations of financial
instruments and deferred tax. Commentary
on the performance in the year is set out in the
CFO’s review on page 51 and the calculation
of underlying EPS is set out in note 15 to the
financial statements.
WASTE WATER TAKEN SAFELY AWAY
926
725
28%
deterioration
3,766
36%
deterioration
5,120
63.0%
64.9%
8.1%
1.9%
increase
6.7%
1.4%
decrease
2018/19
2019/20
2018/19
2019/20
2018/19
2019/20
2018/19
2019/20
Internal sewer flooding 2 (No. of incidents)
External sewer flooding 2 (No. of incidents)
Gearing
Gearing is calculated as the Group’s net debt
divided by the Regulatory Capital Value of
the regulated businesses. It is an important
metric in Ofwat’s regulatory model, which
for AMP7 is based on a notional gearing
level of 60%. Low gearing would lead to a
higher cost of capital as this would indicate
a reliance on more expensive equity funding.
High gearing indicates greater risk of
default on debt finance.
Return on Regulated Equity (‘RoRE’)
Return on Regulated Equity (‘RoRE’) is a key
metric used by Ofwat and is the performance
metric used in our Long Term Incentive Plans.
It measures performance against an expected
return set by Ofwat.
Performance is measured in three areas:
– total expenditure (‘Totex’) measures efficiency
in operational and capital expenditure;
– operational performance is measured by the
customer Outcome Delivery Incentive (‘ODI’)
reward earned or penalty incurred; and,
– financing performance is measured by
performance against Ofwat’s expected
cost of debt set in the Final Determination.
Commentary on the performance in the year
compared to the previous year is set out in
the CFO’s review on page 51.
Sewer flooding inside the house, including
cellars and attached garages, is the worst
service failure our customers can experience.
It occurs when the capacity of the sewer
becomes overloaded and backs up through
the drains.
Many of our sewers also collect rain water.
The severe weather we have experienced
over the last 12 months has led to our
sewers being fuller than normal, leading
to more incidents than normal and a 28%
increase from last year.
Over the past five years we’ve made
significant improvements to reduce the
risk of sewer flooding. Looking forward
we intend to make a further step change
and widen the scope of flooding to include
public open spaces.
A THRIVING ENVIRONMENT
328
288
Sewer flooding outside the house, on drive
ways, garden and external buildings, is one
of the worst service failure our customers
can experience. It occurs when the capacity
of the sewer becomes overloaded and backs
up through the drains.
Many of our sewers also collect rain water.
The severe weather we have experienced
over the last 12 months has led to our sewers
being fuller than normal, leading to more
incidents than normal and a 36% increase
from last year.
Over the last five years we’ve reduced the
number of incidents by around 50%; our
ambition for the future is to return to and
exceed our best ever levels of performance.
567
12%
improvement
343
65%
improvement
2018/19
2019/20
2018/19
2019/20
Pollutions incidents 2 (No. of incidents)
Biodiversity 2 (No. of hectares of SSSIs)
Protecting and improving the environment
is one of our customers’ top priorities.
When sewage escapes from our network
it can damage the environment, these are
known as pollution incidents.
In the last 12 months we’ve reduced the
number of category 3 (minor) incidents
by 12% to our lowest level in a decade.
But we know there is still more to do, that’s
why we’ve committed to aim for a 50%
reduction in the total number of incidents by
2025. We’ll achieve this in part by improving
our understanding of our network through
improved telemetry, allowing us to respond
before an issue impacts the environment.
Improving the environment through
changes in the biodiversity of our region
is a real priority for us. One way we can
track this is the number of hectares of sites
of special scientific interest (SSSIs) in our
region that are considered to be favourable
by Natural England.
This year is the culmination of a five-year
programme to improve over 200 hectares
of land within our English operating area.
Looking forward we have a big ambition to
improve the biodiversity of 5,000 hectares
of land, not just SSSIs, by 2027.
Notes
1 A number of our operational KPIs contribute to more than one of our Business Plan outcomes.
2
Performance commitments relate to Severn Trent Water as it operates today, following
the realignment of the England – Wales boundary.
3 Alternative performance measures are defined in note 44 to the Group financial statements.
33
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information
OUR MARKET
In a year of important global, political,
regulatory and Company milestones,
Severn Trent has maintained focus
on supporting our customers and
communities, demonstrating our
commitment to our social purpose.
T
E
K
R
A
M
Y
R
T
S
U
D
N
I
W
E
I
V
R
E
V
O
A total of 17 regional businesses supply water services to over
50 million household and non-household customers in England
and Wales. 11 of these, including Severn Trent Water Limited
and Hafren Dyfrdwy Cyfyngedig, provide water and waste water
services; the remaining six provide water only.
This year marked the 30th anniversary of the privatisation of the
water industry in England and Wales. Following nearly £160 billion
of investment over three decades, customers are now five times
less likely to be affected by a supply interruption and eight times less
likely to be affected by sewer flooding. Leakage has been reduced by
a third and bills have stayed broadly stable in real terms since 1994.
Although our industry has achieved much to be proud of over the
last 30 years, at the close of 2019/20 our focus turned to playing
our part as our nation faced its toughest challenge of recent years.
Supporting our customers and communities during COVID-19
The COVID-19 pandemic that emerged over the course of the last
quarter of 2019/20 is unprecedented, and rapidly developing even
as this Annual Report and Accounts is being written. As a provider
of an essential public service, we have a vital role to play and have
first and foremost worked to protect our core services and the
people who deliver them. With established business continuity
plans, we have quickly responded to Government advice and our
dedicated people, systems, and processes have proved adaptable
to this continuously changing operating environment.
Protecting our core service is vital, but there is also more we can do
to support the people and communities we serve. As our customers
enter uncertain times, many may be vulnerable as a result of a change
in their financial or medical circumstances. We worked to promote
our financial support initiatives for those struggling to pay their bills,
including the WaterSure scheme for those on low incomes and our
Big Difference Scheme, which offers bill discounts of 10%-90% for
eligible customers. We are making sure our vulnerable customers
know we are there for them with targeted communications and
support through our Priority Services Register.
We also recognise that many of the third sector organisations that
support our vulnerable customers are facing challenges too. So we
have established a COVID-19 £1 million emergency fund to support
non-profit organisations and charities helping those affected by
COVID-19, with over £500k already donated to 200 organisations.
D
N
A
With a planning horizon of over
25 years, as an industry we
must all now tackle climate
change, population growth and
volatile weather patterns – as
well as maintaining the trust of
the people we serve in the face
of these challenges.
34
Severn Trent Plc Annual Report and Accounts 2020
WORKING WITH
OUR REGULATORS
AND STAKEHOLDERS
As a provider of an essential public service we work
within a wide-ranging regulatory framework.
Our regulators’ areas of responsibility
Y
C
I
L
O
P
N
O
I
T
A
T
N
E
S
E
R
P
E
R
D
N
A
N
O
I
T
A
L
U
G
E
R
The Department for the Environment,
Food and Rural Affairs (‘Defra’) in England,
and the Welsh Government in Wales provide
strategic and policy direction for the industry
and our regulators.
The Consumer Council for Water (‘CCW’)
speaks on behalf of water consumers in
England and Wales. It provides advice
to consumers and takes up complaints
on their behalf.
Ofwat is the economic regulator for the
industry in England and Wales. Ofwat
principally exercises its duty to protect
the interests of customers through periodic
reviews of charges (‘price reviews’) every
five years.
The Drinking Water Inspectorate (‘DWI’)
independently checks that water supplies in
England and Wales are safe and that drinking
water quality is acceptable to consumers.
The Environment Agency (‘EA’) allows us
to collect water from reservoirs, rivers and
aquifers and return it to the environment
after it has been used by our customers
and treated by us.
Natural England advises the Government
on the natural environment in England and
helps to protect nature and the landscape,
especially for plant and animal life in both
fresh water and the sea.
Natural Resources Wales is the environmental
regulator in Wales. It oversees how the
country’s natural resources are maintained,
improved and used, both now and in the future.
We also work with a range of other regulators including:
– the Health and Safety Executive to manage risk and ensure
that the health and safety of our employees, customers and
visitors is preserved; and
– Ofgem, the economic regulator of gas and electricity markets,
whose remit extends to renewable energy generation.
35
Ready for AMP7
While COVID-19 emerged as a critical issue in the final quarter,
uncertainty around Brexit had dominated much of the national
conversation over the first three-quarters of the year, culminating
in a General Election in December. For the water industry, this
meant further political debate about ownership models.
We continued to be active advocates of our industry’s achievements,
citing independent analysis that showed that in five out of six key
measures of performance – including water quality, customer service
and costs – the English and Welsh water industry was either the top
performer or the most improved in Europe.
This year also marked another significant milestone in our industry’s
future as Ofwat made its final decisions on companies’ business
plans for Asset Management Period 7 (‘AMP7’) covering 2020-25.
As a ‘fast-tracked’ company we received an early endorsement of our
plan in January 2019 which provided us with the certainty needed to
progress our readiness for AMP7. While Ofwat consulted on its initial
decisions over the course of 2019, we were actively engaged and in late
January and early February 2020 both Severn Trent Water and Hafren
Dyfrdwy respectively accepted Ofwat’s Final Determinations – more
detail on our business plans is included on pages 36 to 37.
Looking to the next 25 years
With a planning horizon of over 25 years, as an industry we must all
now tackle climate change, population growth and volatile weather
patterns – as well as maintaining the trust of the people we serve
in the face of these challenges.
Innovation and collaboration will be critical to the sustainability
of our industry. Last year we launched a new model of innovation
for our sector – the World Water Innovation Fund – committing
to an investment of £5 million over five years. Almost a year on,
and now with 12 members, the Fund covers 60 million customers,
240,000 km of pipes and 40,000 water industry experts. There are
seven live trials currently ongoing, focusing on new ways to tackle
leakage, pollutions, water quality, supply interruptions and drinking
water discolouration.
Ofwat announced its intention to create a further fund to drive
transformational innovation in the English and Welsh water industry
during the year. This welcome development will provide another source
of collaboration and funding, some £200 million during 2020-25, for
innovation that focuses on the industry’s shared challenges.
There were also important moves towards creating greater national
resilience against droughts. Over the next five years, nine companies
including Severn Trent will work on the development of 17 projects
to allow greater flexibility to move water resources between regions.
Our involvement includes a ground-breaking development to move
water from the North West to the South East via the River Severn
and a new pipeline. The project will be ‘shovel ready’ by 2025.
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information
OUR BUSINESS PLAN 2020-25
Our plan for the next five years is ambitious,
innovative and keeps our purpose at its core.
A fast-tracked plan
Severn Trent Water’s plan was developed over three years as part
of a process (called ‘Price Review 2019’ or ‘PR19’) to set price
and revenue controls, performance commitments and customer
outcome delivery incentives (‘ODIs’).
Ofwat’s initial assessment of Severn Trent Water’s plan in January 2019
was very positive. We were one of just three companies awarded
‘fast-track’ status which we see as a firm endorsement of our high
standards of governance, the sustainability of our business and our
focus on customers and communities.
PR19 is a consultative process, so we had the opportunity to engage
with Ofwat as it published further detail on its decisions, in April 2019.
By seeking to find the most effective means to achieve shared aims
with Ofwat, although the weighted average cost of capital (‘WACC’) was
reduced for the industry as a whole, we were able to secure a greater
Totex allowance, de-risked cost uncertainty relating to business rates,
and created a stronger package of incentives, when Ofwat published
its final decisions (the ‘Final Determination’).
There were positive developments for Hafren Dyfrdwy too. While
initially assessed as one of the 14 companies required to resubmit
their plans early in 2019, the stronger evidence we provided to Ofwat
resulted in a greater cost allowance and a more pragmatic glidepath
to achieve service improvements.
We accepted Ofwat’s decisions in January and February 2020 and
are now fully focused on delivering both companies’ plans.
Putting people and society first
Our Severn Trent Water plan was shaped by the largest engagement
exercise we have ever coordinated, consulting with 32,000 customers
and considering a further 1.9 million customer views. As part of this
we established new methods of listening to our customers, such as
our online community ‘TapChat’, which enabled customers to give us
rapid feedback on our proposals. It is a channel that we continue to
use today to shape our services and communications.
Consistent with what our customers told us, our plan aims to not
only deliver further ambitious improvements in the core service that
they rely on, but also deliver more for the communities and natural
environment that we all live and work in. So while we are delivering
a 43% reduction in supply interruptions, a 15% reduction in leakage
and resolving 95% of pressure issues first time, we will also be helping
195,000 financially vulnerable customers a year by 2024/25, playing our
part to improve 2,100 km of river, and creating £0.6 million of new
natural capital by installing sustainable drainage solutions in local
communities.
Going further for sustainability
This year we expanded on our plans with a specific lens on sustainability.
Over the next five years we will be investing £1.2 billion towards
sustainable approaches and outcomes, and we announced our ambition
to go even further for sustainability in a number of areas including:
– boosting biodiversity across 5,000 hectares by 2027;
– reducing pollutions by 50% by 2025; and
– achieving the Triple Carbon Pledge by 2030.
More detail is included in our first dedicated Sustainability Report
(which can found on our website at severntrent.com).
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START OF AMP6
2018
SEPT: BUSINESS
PLANS SUBMITTED
2019
JAN: OFWAT’S INITIAL ASSESSMENT
APR: FAST TRACK DRAFT DETERMINATIONS
JUL: SLOW TRACK DRAFT DETERMINATIONS
DEC: FINAL DETERMINATION
2020
AMP7
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Severn Trent Plc Annual Report and Accounts 2020
OUR BUSINESS PLAN FOR 2020-25
9%
average bill
reductions
15%
reduction in leakage
(and a further
commitment to achieve
50% by 2045)
43%
reduction in supply
interruptions
2,100 km
of rivers improved
£6.8bn
Totex allowance
195,000
financially vulnerable
customers supported
a year by 2024/25
£
1%
of profits donated to charities
and community groups
21%
reduction in internal
sewer flooding
GOING FURTHER FOR SUSTAINABILITY
Triple
Carbon Pledge
5,000
hectares of
biodiversity improved
50%
reduction in
pollutions
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REGULATED WATER
AND WASTE WATER
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A COMPANY
YOU CAN
TRUST
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A
POSITIVE
DIFFERENCE
Page 39
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LOWEST
POSSIBLE
BILLS
Page 40
Page 41
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A SERVICE
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GOOD
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Page 43
Page 44
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WATER
ALWAYS
THERE
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WASTE WATER
SAFELY
TAKEN AWAY
Page 45
9
Page 46
A THRIVING
ENVIRONMENT
Page 48
We focus what we do
towards nine outcomes
for the customers and
communities we serve,
and the environment
that we depend on.
Our Regulated Water and Waste Water business
includes the wholesale water and waste water
activities (excluding Bioresources) of Severn Trent
Water Limited and its retail services to household
customers, and Hafren Dyfrdwy Cyfyngedig.
Unless stated otherwise, the information in this
section relates to Severn Trent Water, which
makes up 98% of our total customer base.
As this year marks the close of the AMP6
investment period we have looked back
across the full five years of 2015-20, as
well as performance in 2019/20.
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Our stakeholders expect us to be a company that not only delivers
on its commitments, but also considers how it delivers those
commitments – being honest about progress along the way.
Living our values
Our Purpose and Values set the cultural tone of our organisation,
guide our behaviours and express the intent behind what we do.
This year we undertook a consultative project involving people from
across our organisation – from the front line of our operations to our
Board – to re-articulate our Purpose and Values in a way that would
be meaningful and inspiring for everyone. More detail is on page 14.
Strong employee engagement
A happy and motivated workforce is vital to securing the trust of our
customers and other stakeholders – so we were delighted with this
year’s QUEST engagement score of 8.1 out of 10 which placed us in
the top 5% of global utilities. More detail on employee engagement
is included on page 20.
Involving our customers
Our commitment to including customers in our decision making
has not ended with our PR19 plan. Our online community of almost
15,000 customers – ‘TapChat’ – has taken part in 25 discussions this
year on wide-ranging topics from delivering our social purpose to
roadworks. The community is a valuable critical friend that together
with our ongoing customer tracking research and growing data
analytics capability – including social media tracking – helps to
bring the customer perspective into our daily decision making.
A fair approach to tax
Tax is a very public way that all businesses contribute to the society
that they serve. We are proud to have been accredited with the
Fair Tax Mark, an independent assessment which recognises our
commitment to paying the right amount of tax at the right time,
and applying the ‘gold standard’ of tax transparency.
Independent benchmarking
Independent benchmarking of our efforts helps us to understand
relative strengths and weaknesses while providing a ‘trusted voice’
for our stakeholders. In early 2020, Severn Trent received an ESG Risk
Rating of 18.6 and was assessed by Sustainalytics to be at low risk of
experiencing material financial impacts from ESG factors. This rating
places us in the first percentile within the water utilities subindustry
(as assessed by Sustainalytics). We were also ranked 10th in the
inaugural Tortoise Intelligence Responsibility100 Index (an index
unique for ranking whether companies do what they say they will –
providing a ‘walk’ as well as ‘talk’ perspective on performance).
Cementing our commitment
As stewards of an essential public service, we recognise that our
commitment to social purpose cannot be short term. This year we
consulted with our stakeholders to understand their expectations
of a socially purposeful company. We also asked Ofwat to introduce
a new condition to our Licence to make us legally accountable. If
accepted by Ofwat, this binding undertaking will not only embed our
commitment to making decisions for the long term for today’s Board
and employees, but also future generations of Severn Trent people.
15,000
Our online community of
almost 15,000 customers –
‘TapChat’ – has taken part in
25 discussions this year
8.1
Our employee engagement
score was 8.1 out of 10 –
placing us in the top 5%
of global utilities
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Because of the unique nature of what we do – a service that literally
flows right through communities – we can make changes right across
our value chain that add up to a big difference for our communities.
Inspiring a generation
This year we have continued the roll-out of our innovative schools
programme, which aims to inspire school children by immersing
them in a virtual world that reinforces the value of water, responsible
sewer use, and the importance of hydration in health. During 2019/20
we reached almost 100,000 children, which together with our ongoing
customer engagement has helped us to reach over 800,000 people
across the five years. Over the next five years we want to inspire
another generation of water users and are aspiring to reach 500,000
school children.
Promoting hydration while reducing plastic use
Concern about plastic use is front of mind for many of our customers,
and we are well placed to help reduce the need for single-use plastic
water bottles by making tap water more accessible. Over the last
year we have helped to sign up around 600 businesses (making a
total of 2,300 in our region by March 2020) as part of the national
Refill scheme to display a blue sticker welcoming anyone passing
by whose water bottle is running low to call in and fill up for free.
An international contribution
This year we moved into a new phase of our 39-year partnership
with WaterAid – a charity that provides clean water and sanitation
to overseas communities in need – with a five-year project working
to help 100,000 households within the Assasuni region of Bangladesh.
This is a new model of working with WaterAid, focusing on a specific
geographical area. Through the project not only will much needed
sanitation infrastructure be provided, but other opportunities will
also be created including the empowerment and training of
80 women to run reverse osmosis treatment plants.
Volunteering to support our communities
In 2019/20 nearly 1,500 of our employees volunteered to support
their local communities. We hosted over 130 events across the
region, planting 2,800 trees and plants, removing 500 bags of litter
and cleaning up 47 km of riverbank.
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LAUNCHING OUR £10 MILLION
COMMUNITY FUND
The new Severn Trent Community Fund is
providing grants to projects that support the
wellbeing of communities across three categories –
people, place and environment. Funded from 1%
of Severn Trent Water’s profits, the grants range
from £2,000 for smaller local projects to £250,000
for inspirational projects that have the potential to
transform communities.
With decisions made by an independent customer
panel, and totalling around £10 million over the next
five years, the fund will provide a much needed boost
to the declining grant making landscape in our
region. In April 2020 we ring-fenced £500,000,
part of a total Severn Trent commitment of
£1 million, to allocate to charities supporting
vulnerable customers in the wake of the COVID-19
pandemic.
Severn Trent Plc Annual Report and Accounts 2020
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We are always looking for efficiencies and opportunities
to innovate to keep our bills as low as possible.
Lower bills, more value
Ofwat ranks Severn Trent amongst the most cost-efficient companies
in the water industry which is helping to keep our bills low – in 2019/20
and over the last 10 years we have had the lowest combined bills in
England. Our customers’ perceptions of value for money have also
improved – reaching 66% at the close of the AMP, compared with 57%
in its first year. And we will continue to offer one of the lowest bills in
AMP7, as we deliver a 9% real reduction over the five-year period.
Sustainable investment
Making the right investment choices now ensures our assets continue to
deliver the service levels that our customers want, and by making sure
we invest efficiently, also keeps bills affordable – for today’s customers
and future generations. In 2019/20 we invested over £760 million in our
asset base, as well as a further £145 million in renewing our water and
sewer network. This year marked the completion of our £300 million
Birmingham Resilience Programme (see page 45) and schemes to
improve river water quality that helped us to outperform our Water
Framework Directive performance commitment.
We also launched our Sustainable Finance Framework which aims
to provide a stronger link between the way we raise money and
the benefits we deliver to communities and the environment.
Achieving efficiencies responsibly
As a socially purposeful company, we believe cost savings must
be achieved responsibly. This year we were accredited by the Living
Wage Foundation, and have made the real Living Wage a mandatory
term in all future contracts. We expect all of our suppliers to sign up to
our Sustainable Supply Chain Charter, committing to upholding the
same values expected of our colleagues.
SUSTAINABLE SEWAGE TREATMENT
Our industry has historically relied on tried
and tested investment solutions to meet higher
environmental standards and growth pressures.
Our sustainable sewage treatment customer
ODI rewards us for finding innovative alternatives
to build capacity – two schemes have qualified
this year.
In a UK first, our installation of a pre-treatment
phase at our Rugby works, using BioMag®
technology, has added 25% capacity and will
allow us to accommodate forecast growth for
much lower installation costs than a traditional
solution. And, at our Finham works, we have
used a novel combination of different technologies
in our activated sludge processes to increase
capacity by 33%. These are innovations we can
now share with our industry to encourage their
consideration as viable options.
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We want everyone to access and afford our service,
no matter what their circumstances.
Improving affordability
The proportion of our customers who tell us they find their bill
unaffordable has fallen from 16% in 2014/15 to 9% this year. This
change is welcome, but for such an essential service, we know we
have to do more. By 2024/25 we want to help 195,000 customers
a year with their bills, and as part of our industry’s public interest
commitment we will go even further by 2030 by eradicating water
poverty (paying greater than 5% of disposable income on water bills).
This year around 70,000 customers benefited from financial support
and advice, the majority of which, c.50,000, were on our social tariff. And
we worked to improve the service experience of those we support by
enabling auto-renewals for our social tariff and reducing the application
processing time for Water Direct (a scheme administered in partnership
with the Department for Work and Pensions) by around 90%.
Customers also benefited from our £3.5 million annual donation to
the Severn Trent Trust Fund – an independent charity that administers
grants to support those in financial difficulty.
Supporting accessibility
Contacting any company to discuss difficult personal circumstances
can be daunting. Our continued digital expansion (see page 43) is
allowing us to connect with customers in a different way. By using a
tone of voice and tailored advice that resonates with each individual, we
can create emotional and personal contacts, often reaching customers
who are less comfortable with a telephone exchange – including those
experiencing bereavement, social anxieties and hearing impairment.
Supporting our customers through COVID-19
Our support for vulnerable customers is just one part of a wider network
that they rely on. So as well as doing more to promote our own support
options during the COVID-19 pandemic, a COVID-19 £1 million fund was
established with over £500,000 already donated to c.200 organisations.
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c.70,000
customers benefited from
financial support and
advice this year
£3.5m
annual donation
to the Severn Trent
Trust Fund
200
charities and community groups
helped by our COVID-19
emergency fund
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We want to consistently exceed our customers’
expectations and deliver an outstanding experience.
Digital shift
While we are retaining more traditional contact methods,
our customers are increasingly embracing new digital options.
Following the introduction of our new chatbot ‘Juno’, improvements
to our web self-serve, and expanding our social media team, total
payments collected online have increased from £35 million in 2013
to £76 million this year. And as a more cost-effective approach,
this shift reduces our cost to serve.
Our efforts are being recognised too. We were delighted to win gold
for ‘Most Effective Digital Customer Experience’ at the European
Contact Centre and Customer Service Awards – which we see as
an endorsement that we are leading the way in digital customer
experience across our industry.
New perspectives on customer experience
Unlike its predecessor (the Service Incentive Mechanism or ‘SIM’),
Ofwat’s new measure of customer experience (‘C-MeX’) places
the same weighting on the perceptions of all our customers as
on those who contact us. In its pilot year we have ranked ninth,
so we know we have more to do in this important transitional period
as the C-MeX measure is refined, and we focus on making every
customer touchpoint a positive experience, including roadworks,
visitor sites, and social media.
SEWER MEN – BRINGING
OUR SERVICE TO LIFE
Research for our business plan revealed that
our customers would like to know more about
how we deliver our service – and have a better
sense of satisfaction when they do. This year
we worked with ITV to produce a two-part
documentary, ‘Sewer Men’, that followed our
waste teams as they unblocked drains and went
waist-deep into sewers clogged with wet wipes
and fatbergs. A fifth of our customers recalled
seeing the programme, of whom 72% said it
improved their perception of Severn Trent.
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Providing a safe supply of water for our customers to enjoy is at the very
heart of what we do. We treat water like a food production line – aiming to
ensure that we consistently achieve the highest standards at every stage.
Progress on water quality
After a challenging start to AMP6, the additional investment that we
have focused on improving water quality is starting to show promising
results. While we fell short of our customer ODIs for compliance and
drinking water quality complaints, we have secured a 14% reduction
in complaints over the last year and a 28% reduction over AMP6.
We also met our performance commitment for asset health, which
was in part achieved by a programme of capital works to upgrade
our water storage tanks and sampling facilities. This improved asset
performance means that we expect our performance on DWI’s new
compliance risk index to improve by 40% this year – an improvement
that places us in a stronger position to meet AMP7’s challenging targets.
Going even further with catchment management
Working with farmers in the catchments surrounding our raw
water sources has been one of our key successes over AMP6.
Through building stronger relationships with over 5,000 farmers
and providing 1,500 grants to prevent phosphates from fertilisers
running-off into water sources, over the last decade we have been
able to negate the need for £74 million of investment in our treatment
processes. This year we announced ambitious new plans to engage
with almost 9,000 (63%) of the farmers in our region by 2025 –
engagement opportunities we will also use to enhance biodiversity.
More detail is included on page 16 and in our Sustainability Report.
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REPLACING HAFREN DYFRDWY’S
VICTORIAN ASSETS
Despite the challenging weather conditions towards
the close of the year created by successive storms,
we completed the construction and refurbishment
of two treated water storage reservoirs serving
over 7,000 properties in and around Wrexham.
The assets will improve the resilience of water
supplies for these local communities for generations
to come and also allow the decommissioning of
an existing 150-year old reservoir.
They mark the successful completion of a
five-year investment programme and customer
ODI to improve eight water quality assets in the
Hafren Dyfrdwy region.
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We will ensure that water is always there when our
customers need it – both today and for future generations.
Improving network management
A thorough understanding of our end-to-end processes, underpinned
by accurate data, is helping us to drive improvements across our
network. For example, the installation of c.40,000 loggers has played
an important role in finding and fixing leaks more quickly and has
helped us a achieve a 19 Ml/d leakage reduction (4% year on year)
and outperform our regulatory target for the AMP.
At 7 minutes 18 seconds, our supply interruptions performance has
now improved by over 60% this year, following challenging operating
conditions earlier in the AMP. Insourcing our Network Response
Team has been a key benefit – giving us more flexibility to respond
and helping us to get customers back on supply faster.
Securing future supplies
In July 2019 the Secretary of State for the Environment approved the
publication of our final Water Resources Management Plan. This
25-year strategic plan prioritises demand management in our region
– including a step change in leakage, water efficiency and metering
activity – as well as developing new, more environmentally sustainable
water sources. And we are helping national supplies too through our
work on the North West to South East interconnector (see page 31).
Supporting our customers to reduce their water use
This year we continued the roll-out of our home water surveys which
help our customers to make the best use of water efficiency devices
in their homes. With c.82,500 completed since 2015, we are also
benefiting from much better insight about the causes of leaks on
customers’ private supply pipes and fixtures. Private supply-side
leaks not only contribute to overall leakage, but also can be a cause
of concern to our customers. With the installation of c.35,000 meters
this year, in line with the prior year, we will have stronger data to help
customers find them.
SECURING BIRMINGHAM’S WATER
SUPPLY FOR THE NEXT 100 YEARS
The Birmingham Resilience Programme
provides a second supply option for 1.2 million
customers in our nation’s second biggest city.
Involving almost 26 km of pipeline, an increase
in supply of 130 Ml/d; a new water treatment
plant; and a significant programme of customer
engagement, the scheme will allow us to better
maintain the 119 km gravity-fed Elan Valley
Aqueduct, and protect a low carbon supply
for years to come.
At £300 million, the scheme is the biggest
engineering project that Severn Trent has
ever embarked upon, and construction was
successfully completed on time for the close
of the AMP.
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Every day we take 3.2 billion litres of our customers’
waste water away, ready to be made safe to return
to the natural environment.
Reducing sewer flooding and pollutions
In the first four years of AMP6, we made substantial improvements
in our waste service, including a 62% reduction in external sewer
flooding, 38% reduction in internal sewer flooding, and an 11%
reduction in Category 3 pollutions. And last year we locked in these
improvements for customers by agreeing with Ofwat new ambitious
targets and the opportunity to earn further rewards (with the lifting
of the waste customer ODI outperformance cap).
This year, we achieved our best Category 3 pollutions performance
in a decade and have raised our ambition for AMP7 to achieve a 50%
reduction in overall pollutions – an ambition that goes beyond our
regulatory target. However, with a 28% and 36% increase respectively
over last year our performance on internal and external sewer flooding
has been disappointing and we were challenged by persistent wet
weather, highly saturated ground and increased run-off of waste
water in the second half of the year.
Tackling flooding in partnership
The latter part of the year was marked by a prolonged period of
heavy rainfall through Storms Ciara, Dennis and Jorge that led to
flooding across our region. With responsibility for flooding shared
between agencies, including water companies, local authorities
and the Environment Agency, our teams worked to support both
our customers and other flood authorities.
We also outperformed our partnership working customer ODI,
by successfully delivering 26 schemes designed with other flood
authorities (against a target of 21). With similar weather volatility
expected in the future, our AMP6 experience leaves us well positioned
to further embed this joined up approach to building flooding resilience.
Tackling blockages together
Around 70% of blockages on our network are caused by customers
flushing non-flushable wipes or fats, oils and greases down toilets
and sinks – a challenge we must tackle. The language used on
products in the home can be confusing, so we have continued to
push the industry’s ‘Fine to Flush’ messaging through partnering
with other companies in an accreditation scheme for wet wipes.
We expect to see improvements in future as this market driven
solution becomes the expected standard across the product range.
UNLOCKING DATA TO TARGET BLOCKAGES
With ambitious targets for AMP7, we are working
to better understand the drivers of blockages
and pollutions. In a Hackathon experimenting
with analytics technology, we were able to run
over 80 million hypotheses and, with the expertise
of our operational teams, create a prototype
model to predict where pollutions are likely to
occur, with the potential for future development.
We are also adopting a behavioural change
framework used in other sectors like healthcare,
together with a programme of research, to better
understand our customers’ flushing habits and
how to change them.
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We rely on the natural environment, so taking care of natural
resources while using nature as a source of innovation and
climate change mitigation, is fundamental to what we do.
Improving our region’s rivers
The Water Framework Directive aims to improve the ecology of
rivers, and support the wildlife and habitats that depend on them.
Our innovative use of catchment-based approaches to manage our
impact on the river system as a whole has helped us to deliver more
for the wider ecosystem than focusing on single issues in isolation.
Our final programme has delivered 279 points of improvement
which is 20% more than our original expectations, and
equates to improvements in around 1,600 km of river.
Boosting biodiversity
Our role in communities, the estates we manage and our relationship
with rivers and water sources mean we have huge potential to boost
the biodiversity in our region – and we have support from our customers
to do so. This year we have exceeded our AMP6 customer ODI by
improving 244 hectares of our land across the five years and set a
new bold ambition to improve 5,000 hectares (an area around the
size of Gloucester) across our region by 2027.
Our future biodiversity ambition goes further than our AMP7
customer ODI, and includes:
– planting 1.3 million trees (working with the Woodland Trust to
ensure that the trees we plant will be UK grown);
– working with the RSPB in Sherwood Forest to preserve some
of the ancient woodlands;
– working on over 600 hectares in the Peak District to restore
moorland and plant native trees; and
– working with Warwickshire and Nottinghamshire Wildlife Trusts
on enhancing over 400 hectares with new woodlands, wetlands
and wildflower meadows.
These and other projects will build resilience by investing in nature
and natural systems to provide some of our best protection against
the worst effects of climate change. The partnerships we are building
– including with the National Trust, Wildlife Trusts, Rivers Trust,
Woodlands Trust and RSPB – will help us to make a much bigger
contribution for every pound we spend.
Targeting 4* status
We anticipate achieving 4* EPA status from the EA this year,
for the third time in the AMP. This assessment covers a range of
environmental measures and reflects our strong track record on
protecting and enhancing the local environment that we rely on.
Carbon reduction
We are proud to have held the Carbon Trust Standard since 2009.
This certification recognises that we take a best practice approach
to measuring and managing our environmental impacts. In the last
12 months, Severn Trent Water met its carbon reduction target for
water, just missed its target for waste water, and our overall Group
net greenhouse gas emissions fell by 3%.
Last year we also made the Triple Carbon Pledge, a commitment
that means by 2030 we will use 100% renewable energy, have a fully
electric fleet of vehicles (as long as the technology is available) and
have net zero carbon emissions. And this year, with the increased
self-generation of renewable energy by Severn Trent Group to the
equivalent of 51% of Severn Trent Water’s energy needs, and remaining
energy purchased solely from renewable sources, we have already
achieved the first of these pledges.
We have also reinforced our ambition, announcing our commitment
to Science-Based Targets. We are the first water company in the UK
to sign up, which means we will be working to develop longer-term
commitments in a way consistent with the Paris Agreement. This
includes placing more emphasis on reducing our Scope 1 and 2
emissions through our own operations, and stepping up our focus
on Scope 3 emissions and embedded carbon in our assets.
OPENING OUR INDUSTRY
LEADING RESOURCE RECOVERY
AND INNOVATION CENTRE
This year we opened our £5 million research centre
– the first of its kind in the UK. The centre is a vital
tool in our ambition to create a circular economy
from every element of what is traditionally seen as
waste by turning it into a valuable resource. With
three trials already underway, the centre allows us
to undertake large scale technology trials in a way
that was not possible before.
It also further cements our position as a sector
leader on innovation by helping us to secure new
funding sources including the EU’s Horizon 2020
and Interreg research programmes, Innovate UK
and the Carbon Trust. In this AMP alone we have
secured direct grant income of £2.7 million and
leveraged funding of £42 million.
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Leading on self-generation
This year we were proud to deliver on our commitment to self-generate
the equivalent of 50% of our energy needs from renewable sources –
a year earlier than targeted. We are a leader on self-generation in
the water industry and beyond – a practice which not only protects
us from future price volatility but importantly supports our wider
sustainability commitments.
Our targeted investments in solar, wind and hydro assets and our
unique capabilities in anaerobic digestion (‘AD’) of sewage and food
waste mean that we are well placed to expand self-generation in
the future.
Last year’s £120 million acquisition of Agrivert has given us new
scale and capability in our standalone food waste business, and
means that we can play our part as the Government’s Environment
Bill promotes a strong recycling and renewable heat agenda and
favours AD over incineration.
Across our Green Power and Bioresources businesses we are now
the largest owner and operator of AD plants in the UK – delivering
445 GWh of renewables from 37 AD sites in 2019/20. This portfolio
now includes a second Thermal Hydrolysis Plant (‘THP’) for our
Bioresources business at our Strongford works. THP works by
using heat and pressure to treat sewage sludge and enables
extraction of up to 30% more energy than conventional processes.
Welcoming opportunities in Bioresources
This year we also welcomed the opening of the new bioresources
market that creates the opportunity to treat trade waste and other
companies’ sludge. As a land-locked company (without the option
of sea discharges used by others in the last century) Severn Trent
has over 40 years of experience of treating and recycling sludge
efficiently and sustainably. This experience, together with our new
AD capacity and central geographical location, means we are well
placed to trade in the new market. While the market was still in its
infancy this year, we look forward to being a key player as it expands
over AMP7.
Delivering on customer service
Operating Services continued to deliver year-on-year growth and
further improvements in customer service performance on our
two largest contracts: the MOD, and the Coal Authority.
50
Business Services operates a UK-focused
portfolio that complements Severn Trent
Group’s core competencies and is well
positioned to capitalise on market
opportunities in five areas: Green Power;
Bioresources; Operating Services; Property
Development; and Developer Services.
We were also able to deploy our capabilities at short notice to provide
additional pumping support to the Coal Authority, the Environment
Agency and regional Drainage Boards across the North of England
during this year’s storms.
Developer Services continued our twin-track focus on great
customer service with excellent value for money, and we expect
to be upper quartile on the industry’s service performance tables.
With the introduction of the new developer experience measure
(‘D-MeX’) next year, we believe our segmented, tailored approach
to customer offerings will be an important differentiator for us.
Supporting Severn Trent Group’s sustainability ambitions, we also
continued to encourage the adoption of sustainable solutions by
our customers with tariffs that encourage the development of
water-efficient properties.
BRINGING DERELICT LAND
BACK TO LIFE FOR HOUSING
Property Development has now delivered
£34 million in sales in the first three years of
a 10-year plan to deliver £100 million PBIT by
2027. This year, we secured the sale of land in
Sandwell previously used for sewage treatment
to the West Midlands Combined Authority for
housing development.
The scheme, which includes land owned by
Sandwell Metropolitan Borough Council, is
a great example of public and private sectors
working together for the communities we serve
by using our redundant land assets to provide
much needed homes to the region – transforming
land the equivalent of 32 football pitches into
a 750-home development.
Severn Trent Plc Annual Report and Accounts 2020 CHIEF FINANCIAL OFFICER’S REVIEW
CHIEF FINANCIAL
OFFICER’S REVIEW
James Bowling
Chief Financial Officer
These are unprecedented economic circumstances. The extent of the
impact of the COVID-19 outbreak on the UK economy is uncertain. We
are not immune to the impacts on the wider economy and we expect
to see a continued reduction in consumption from non-household
customers, an increase in bad debt costs from household customers,
even after allowing for an increase in the use of our range of social
tariffs, and a severe impact on our non-household joint venture, Water
Plus. We have reflected these on our balance sheet at 31 March 2020,
where appropriate, and further details are set out below.
Our funding position continues to be strong and we are carefully
monitoring our liquidity and working capital. Our balance sheet at
31 March 2020 showed net cash of £48.6 million and we had undrawn
facilities amounting to £755 million. All of our projected investment
and other cash flow needs are covered by cash or committed facilities
through to January 2022. At the year end, the Group’s regulatory
gearing was 64.9%.
This strong financial position was a factor in our decision to declare
a final dividend of 60.05 pence in line with our AMP6 dividend policy
of growth of RPI plus at least 4% per annum. Other matters, over and
above our strong financial position, that the Board took into account
in reaching this decision are noted in the Chief Executive’s review.
At the half-year we flagged the market data issues that were impacting
our non-household retail joint venture, Water Plus. In the second
half of the year we have seen some performance improvement as
the monthly losses relating to these issues have reduced and cash
collection improved. However, Water Plus expects the economic
impact of COVID-19 on non-household customers to be severe and this
has resulted in the joint venture recording losses from the impairment
of its trade debtors, goodwill and certain intangible assets. Before
taking account of these COVID-19 related write-downs, our share of
Water Plus’s loss for the year was £14.3 million, of which £9.3 million
arose in the first half of the year. We also recorded a provision of
£4.9 million against our loans to Water Plus.
Our total share of the Water Plus losses, £51.7 million, was greater
than the value of our long-term investment of £46.8 million and as
a result we did not record £4.9 million of these losses in the income
statement. We have shown the amount of our share of the losses from
Water Plus recorded in the income statement as an exceptional item.
Turning now to our core business, we have built on good financial
performance in the first half of the year to deliver another good set of
results for 2019/20. Although underlying PBIT (see note 44) in our
Regulated Water and Waste Water business was slightly lower than the
previous year, this was expected as we chose to defer customer ODI
rewards worth £78 million into AMP7, taking £22 million less in
revenue than in the previous year, and increased our planned IRE
programme to deliver remaining AMP6 commitments, offsetting the
£22 million comparative benefit of hot weather costs in the previous
year. In Business Services, stronger performance in the second half
of the year in Operating Services and Bioresources produced growth
in both revenues and PBIT for the full year. There were no individually
significant land sales in 2019/20 but the £6.9 million earned this year
means we remain on track to deliver £100 million of PBIT from
property sales over the 10 years to 2027.
Our underlying basic earnings per share (see note 44) was up 0.1%
to 146.0 pence per share. Basic earnings per share were 66.7 pence.
We have delivered good performance on RoRE, which was 6.7% for the
year ended 31 March 2020. The delivery of substantial environmental
programmes meant another strong year on customer ODIs, and we
continued to outperform on financing. This was partly offset by the
impact of our reinvestment of Totex efficiencies delivered earlier in
the AMP. On a cumulative basis, we outperformed across all three
levers over AMP6 and achieved a RoRE of 8.5%, sustaining our position
amongst the very best in the sector.
We are committed to paying the right amount of tax at the right
time. We pay a range of taxes, including business rates, employers’
national insurance and environmental taxes such as the Climate
Change Levy as well as the corporation tax shown in our tax charge n
the income statement. This year we will again publish a Tax Report that
sets out details of all of the taxes we incur at www.severntrent.com/
sustainability-strategy/reports-and-publications/tax/. Our corporation
tax charge for the year, excluding the exceptional deferred tax charge,
was higher than the statutory rate reflecting non-deductible items
charged to our income statement. Cash tax payments were reduced
by the benefit of tax allowances on our capital programme and
contributions to our pension schemes, partly offset by the timing
of instalment payments to HMRC under the current rules.
A brief overview of our financial performance for the year is as follows:
– Group turnover was £1,843.5 million (2018/19: £1,767.4 million),
an increase of 4.3% as Regulated Water and Waste Water revenue
increased by 2.4%, mainly due to the RPI-linked tariff increases
and Business Services’ turnover increased by 19.7% (including
£21.8 million from a full year contribution from the Agrivert
business acquired in the previous year).
– Underlying PBIT was down 0.6% to £570.3 million
(2018/19: £573.6 million). Underlying PBIT in our Regulated
Water and Waste Water business was £15.5 million lower,
Business Services grew by £0.8 million and Corporate and
other results improved by £2.6 million.
– We recorded no exceptional operating costs (2018/19: £9.6 million
arising from the High Court judgment in the Lloyds Bank case
relating to Guaranteed Minimum Pension rights).
– Reported Group PBIT was up by 0.9% to £568.2 million
(2018/19: £563.3 million).
– Net finance costs were £188.4 million (2018/19: £194.2 million).
Our effective interest cost of 3.7% (see note 44) was down from
2018/19 (3.9%) due to the continued benefit of replacing expensive
fixed rate debt with new low cost fixed rate debt, low variable
interest rates and reduced RPI inflation on our index-linked debt.
– Our full effective tax rate was 48.9%, including the exceptional
deferred tax charge arising from the change in corporation tax rate
for 2020/21. Our underlying effective current tax rate (see note 44)
was 10.4%, down from 11.6% in 2018/19 largely due to higher
capital allowances from the larger capital programme in the year.
– Reported Group profit after tax was £158.8 million
(2018/19: £315.3 million).
51
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information CHIEF FINANCIAL OFFICER’S REVIEW
CONTINUED
Regulated Water and Waste Water
Turnover for our Regulated Water and Waste Water business was £1,620.7 million (2018/19: £1,583.1 million) and underlying PBIT was
£511.5 million (2018/19: £527.0 million).
Turnover
Net labour costs
Net hired and contracted costs
Power
Bad debts
Other costs
Infrastructure renewals expenditure
Depreciation
Underlying PBIT
2020
£m
2019
£m
1,620.7
1,583.1
(135.8)
(155.9)
(105.8)
(42.5)
(192.6)
(632.6)
(149.6)
(327.0)
511.5
(124.0)
(161.9)
(102.1)
(25.5)
(186.2)
(599.7)
(141.4)
(315.0)
527.0
Increase/(decrease)
£m
37.6
(11.8)
6.0
(3.7)
(17.0)
(6.4)
(32.9)
(8.2)
(12.0)
(15.5)
%
2.4
(9.5)
3.7
(3.6)
(66.7)
(3.4)
(5.5)
(5.8)
(3.8)
(2.9)
Turnover increased by £37.6 million. The components of this were:
– Higher tariffs, including the impact of the annual RPI increase
on prices, which increased revenue by £48.2 million;
Depreciation of £327.0 million was £12.0 million higher than the
prior year, following the capitalisation of new assets and increased
investment in data technology assets with shorter lives creating
operational efficiencies in our network.
– A net increase of £8.1 million to revenue as a result of a lower
year-on-year adjustment for wholesale revenue in prior periods
billed in excess of the wholesale revenue allowance; offset by
– A reduction year-on-year of £21.7 million on the outperformance
payments earned from customer ODIs taken into revenue this year;
– A number of other smaller variances resulted in an additional net
increase of £3.0 million.
Net labour costs were £11.8 million (9.5%) higher. Gross employee
costs increased by 10.8% due to the annual pay award and the
continuation of our strategy to bring more work in-house. The
significant step up in activity on capital projects this year increased the
level of own labour capitalised, up £16.7 million on the previous year.
Net hired and contracted costs were down £6.0 million (3.7%).
Increases in job volumes and some outsourced debt collection
activity offset the benefit from the in-sourced capital design team
and the costs incurred in the hot, dry summer in the previous year.
Power costs were up £3.7 million driven by the anticipated rise in
pass-through costs. Energy consumption was flat year-on-year as
increased efficiency across the business offset the impact of new
capital schemes and increased pumping required in the wetter
winter. The Group manages its power costs through a combination of
demand management, self-generation and forward price contracts.
Our bad debt charge increased by £17.0 million this year
and represented 3.2% of household revenue (2018/19: 2.0%).
We continued to perform well in collecting recent debt and our
new targeted approach to older debt is showing some promising
results, although the uncollected balance falling into older age
categories this year increased the provision. The impact of COVID-19
has led directly to £2.2 million of the increase in the provision to take
account of the expected impact of the forecast economic downturn
next year on collection of our year end receivables.
Other costs rose by £6.4 million. The increase was predominantly
driven by higher chemical prices and usage due to the completion
of new capital schemes.
Infrastructure renewals expenditure was £8.2 million higher in the
year reflecting the completion of AMP6 projects, including our Trunk
Mains Renewal Programme, enhancing the resilience of our network
as we enter AMP7.
52
Return on Regulated Equity (‘RoRE’)
RoRE is a key performance indicator for the regulated business and
reflects our combined performance on Totex, customer ODIs and
financing against the base return allowed in the Final Determination.
Severn Trent Water’s RoRE for the year ended 31 March 2020 and for
the five-year period ended on that date is set out in the following table:
Base return
Totex performance
ODI performance1
Financing performance
Regulatory return for the year2
2019/20
%
5.5
(2.0)
1.0
2.2
6.7
AMP6
%
5.6
0.5
0.9
1.5
8.5
1 For years 2015/16 to 2018/19, customer ODI performance has been restated by 0.1% p.a. to
recognise the impact of the PR14 SIM penalty over the years when the penalty was earned.
2 Calculated in accordance with Ofwat guidance set out in RAG 4.07.
We have delivered RoRE of 6.7% in the year, outperforming the base
return by 1.2% as a result of:
– Continued outperformance on financing, reflecting our effective
interest cost of 3.7%;
– Customer ODI performance of 1.0%, primarily following successful
delivery of our Water Framework Directive and Sustainable Sewage
Treatment programmes, both the culmination of five years of
investment; and
– Our Totex position of negative 2.0%, reflecting our reinvestment of
efficiencies from earlier in the AMP, enhancing our resilience and
supporting customer ODI performance, as well as increased spend
on maintenance schemes, and a higher bad debt charge.
Our cumulative AMP6 RoRE of 8.5% highlights a strong AMP performance
where we have outperformed the Final Determination on all components
of RoRE. Over the five-year period we have delivered a sector-leading
customer ODI performance, overall net Totex efficiencies, and strong
upper quartile performance on financing.
Severn Trent Plc Annual Report and Accounts 2020 Business Services
Turnover
Operating Services
Green Power
Bioresources
Other
Underlying PBIT
Operating Services
Green Power
Bioresources
Property Development
Other
2020
£m
70.7
53.5
102.4
13.8
240.4
14.8
6.6
29.3
7.7
6.5
64.9
2019
£m
60.2
29.7
97.5
13.5
200.9
7.0
0.6
29.5
19.9
7.1
64.1
Increase/(decrease)
£m
%
10.5
23.8
4.9
0.3
39.5
7.8
6.0
(0.2)
(12.2)
(0.6)
0.8
17.4
80.1
5.0
2.2
19.7
111.4
1,000.0
(0.7)
(61.3)
(8.5)
1.2
Business Services turnover was £240.4 million (up 19.7%) and
underlying PBIT was £64.9 million (up 1.2%).
In our Operating Services business, turnover and underlying PBIT
increased by £10.5 million and £7.8 million respectively. Improved
performance across all areas within the business, as well as an
increase in the expected whole-life revenues and profits on the
contract with the Ministry of Defence, have driven the increase.
In Green Power, turnover increased by £23.8 million and underlying
PBIT increased by £6.0 million. Strong energy generation complemented
by the first full year of Agrivert, the food waste company acquired in
November 2018, (increasing turnover by £21.8 million and underlying
PBIT by £7.2 million in the current year) have generated the increase.
Turnover from Bioresources increased by £4.9 million, but underlying
PBIT decreased by £0.2 million due to lower wholesale energy prices.
Turnover and underlying PBIT in our other businesses (principally
Affinity Products and Developer Services) was broadly flat year-on-
year. Profits from Property Development were £12.2 million lower
as there were no individually significant disposals in the current year.
We remain on track to deliver £100 million of PBIT from property sales
by 2027 although we expect market conditions to be less favourable in
the next year following the COVID-19 pandemic, resulting in a rephasing
of our planned disposals.
Corporate and other
Corporate overheads were £8.6 million (2018/19: £8.6 million)
and our other businesses generated PBIT of £3.0 million
(2018/19: £0.4 million).
Exceptional items before tax
We recorded no exceptional operating costs (2018/19: £9.6 million from
a High Court judgment in the Lloyds Bank case in relation to gender
equality in Guaranteed Minimum Pension rights).
In 2019/20 we recorded exceptional losses before tax of £51.7 million
arising from the impact of COVID-19 on our joint venture Water Plus,
including £46.8 million from our share of its losses and an exceptional
impairment charge of £4.9 million in relation to our loans receivable
from Water Plus. In view of the materiality of these impacts and the
unprecedented nature of the impact of COVID-19 on Water Plus, we
consider these items to be exceptional.
Net finance costs
Despite higher net debt, our net finance costs for the year were
£188.4 million, £5.8 million lower than the prior year due to a
combination of lower interest rates, and effective management
of our debt portfolio. Capitalised interest of £44.2 million increased
by £11.0 million year-on-year due to the higher level of capital activity
in the year.
Our effective interest cost was 3.7% (2018/19: 3.9%) and our effective
cash cost of interest (excluding the RPI uplift on index-linked debt
and pensions-related charges – see note 44) was 3.1% (2018/19: 3.1%).
Net pension finance costs were broadly in line with the previous year.
Our earnings before interest, tax, depreciation and amortisation
(‘EBITDA’) interest cover was 5.3 times (2018/19: 5.1 times) and
underlying PBIT interest cover was 3.2 times (2018/19: 3.2 times).
See note 44 for further details.
Gains/losses on financial instruments
We use financial derivatives solely to hedge risks associated with
our normal business activities including:
– Exchange rate exposure on foreign currency borrowings;
– Interest rate exposures on floating rate borrowings;
– Exposures to increases in electricity prices; and
– Forthcoming changes in the regulatory model from RPI to CPIH.
We hold interest rate swaps with a net notional principal of £50 million
fixed to floating, £423 million floating to fixed, £250 million of forward
starting interest rate swaps, floating to fixed, and cross currency
swaps with a sterling principal of £141 million, which economically act
to hedge exchange rate risk on certain foreign currency borrowings.
We revalue the derivatives at each balance sheet date and take the
changes in value to the income statement, unless the derivative is
part of a cash flow hedge.
Where hedge accounting is not applied, if the risk that is being hedged
does not impact the income statement in the same period as the
change in value of the derivative, then an accounting mismatch arises
and there is a net charge or credit to the income statement. During
the year there was a loss of £9.8 million (2018/19: gain of £28.5 million)
in relation to these instruments.
53
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information CHIEF FINANCIAL OFFICER’S REVIEW
CONTINUED
Note 12 to the financial statements gives an analysis of the amounts
charged to the income statement in relation to financial instruments.
As part of our power cost management strategy, we have fixed 62.4%
of our estimated wholesale energy usage for 2020/21.
Share of loss of joint venture
Our joint venture, Water Plus, had a difficult year. Billing and revenue
assurance issues identified early in the year impacted trading results
in the first half and the recovery that was starting to bear fruit in the
second half was stopped in its tracks by the COVID-19 outbreak.
In common with other participants in the non-household retail market,
Water Plus has been significantly impacted by the COVID-19 outbreak,
the resulting lockdown and its effects on commercial customers, and
expects to see lower economic activity leading to increases in business
customer failures. Water Plus reworked its business plan to take
account of the expected impacts of the COVID-19 outbreak on its
customer base and recorded impairments of its goodwill, intangible
assets and trade receivables as a result.
Water Plus has updated its impairment assessment for its long-term
assets, in particular goodwill and customer relationships recognised
under the acquisition accounting rules of IFRS 3. The updated
impairment tests identified an impairment of £51.1 million against
these assets. In addition, Water Plus has already seen a significant
reduction in cash collected from its non-household customers and,
using prospective economic data to estimate the likely impact of future
economic circumstances on its debt book at 31 March 2020, has
recognised an additional £29.3 million bad debt provision.
Further details on the taxes and levies that we pay can be found
in our report, “Explaining our Tax Contribution 2019/20”, available
at www.severntrent.com/sustainability-strategy/reports-and-
publications/tax/.
The corporation tax charge for the year recorded in the
income statement, before exceptional taxes, was £59.2 million
(2018/19: £71.2 million) and we made net corporation tax payments
of £33.9 million in the year (2018/19: £21.3 million). The difference
between the tax charged and the tax paid is summarised below:
Tax on underlying profit
Tax on exceptional items
Exceptional deferred tax charge arising
from rate change
Tax effect of timing differences
Current tax credits recorded in Other
Comprehensive Income or equity
Overprovisions in previous years
Corporation tax payable for the year
Payable by instalments next year
Instalments due in the year
Repayments received
Payments relating to prior years
2020
£m
59.2
0.9
91.8
(120.9)
(9.5)
5.2
26.7
–
26.7
(0.4)
4.5
3.1
33.9
2019
£m
71.2
(1.8)
–
(37.6)
(9.7)
9.4
31.5
(15.9)
15.6
–
5.7
–
21.3
Before taking account of these COVID-19 related write-downs, our
share of Water Plus’s loss for the year was £14.3 million, of which
£9.3 million arose in the first half of the year.
Overpayments
Net tax paid in the year
We have recognised £46.8 million, our share of these losses capped
at the level of our long-term investment, as an exceptional loss from
our joint venture. We have not recognised £4.9 million of losses in
excess of our investment.
We have also recorded an exceptional impairment of £4.9 million
in our loans receivable from Water Plus.
Taxation
We are committed to paying the right amount of tax at the right time.
We pay a range of taxes, including business rates, employers’ national
insurance and environmental taxes such as the Climate Change Levy,
as well as the corporation tax shown in our tax charge in the income
statement. Our corporation tax charge for the year, excluding the
exceptional deferred tax charge, was higher than the statutory rate
reflecting non-deductible items charged to our income statement,
such as losses from joint venture which are reported after tax, partially
offset against tax credits arising from overpayments in the previous
year. Cash tax payments were reduced by the benefit of tax allowances
on our capital programme, contributions to our pension schemes
partly offset by the timing of instalment payments to HMRC under
the current rules.
2020
£m
26.7
81.6
28.9
6.6
4.9
2019
£m
31.5
80.7
25.5
9.6
3.5
148.7
150.8
Tax incurred:
Corporation tax
Business rates and property taxes
Employer’s National Insurance
Environmental taxes
Other taxes
54
The overpayments arose from prudent estimates of the tax charge
for the year when calculating quarterly instalment payments.
Note 13 in the financial statements sets out the tax charges and credits
in the year, which are described below.
The current tax charge for the year was £31.0 million (2018/19: £31.8 million)
and the deferred tax charge, before the exceptional deferred tax charge
arising from the change of rate, was £29.1 million (2018/19: £37.6 million).
In March 2020 the UK Government announced that it would reverse the
previously planned reduction in the corporation tax rate that was due
to take effect from 1 April 2020. This change was substantively enacted
in March 2020 and we have therefore remeasured our deferred tax
assets and liabilities at 31 March 2020 at the new rate of 19%. This
resulted in an exceptional deferred tax charge in the income statement
of £91.8 million and a credit to reserves amounting to £2.7 million.
Our full effective tax rate this year was 48.9% (2018/19: 18.0%), which is
higher than the UK rate of corporation tax (19%), due to the exceptional
deferred tax charge.
UK tax rules specify the rate of tax relief available on capital expenditure.
Typically this is greater in the early years than the rate of depreciation
used to write off the expenditure in our accounts. The impact of this
timing difference applied across our significant and recurring capital
programme tends to reduce our underlying effective current tax rate
and corporation tax payments in the year. By the same token we make
a provision for the tax that we will pay in future periods when the tax
relief on the capital expenditure has been received and we receive
no allowance for the depreciation charge arising on that expenditure.
This is the most significant component of our deferred tax position.
Our underlying effective current tax rate was 10.4% (2018/19: 11.6%)
(see note 44).
The exceptional losses recorded in relation to our joint venture,
Water Plus, are recorded after tax and therefore there is no impact
on our tax charge from these losses.
Severn Trent Plc Annual Report and Accounts 2020 Profit for the year and earnings per share
Total profit for the year was £158.8 million (2018/19: £315.3 million).
Basic earnings per share decreased by 50.0% to 66.7 pence (2018/19: 133.4 pence). Underlying basic earnings per share was 146.0 pence
(2018/19: 145.8 pence). For further details see note 15.
Cash flow
Operational cash flow
Cash capex
Net interest paid
Purchase of subsidiaries net of cash acquired
Payments for swap terminations
Proceeds from swap terminations
Net tax paid
Free cash flow
Dividends
Issue of shares
Purchase of own shares
Change in net debt from cash flows
Debt acquired in subsidiaries
Non-cash movements
Change in net debt
Opening net debt
Closing net debt
Bank loans
Other loans
Lease liabilities
Net cash and cash equivalents
Cross currency swaps
Loans due from joint ventures
Net debt
2020
£m
888.5
(799.5)
(184.2)
–
(16.8)
16.5
(33.9)
(129.4)
(228.4)
9.6
–
(348.2)
–
(49.2)
(397.4)
2019
£m
826.3
(769.3)
(161.6)
(50.9)
–
–
(21.3)
(176.8)
(211.9)
11.1
(1.1)
(378.7)
(63.0)
(35.8)
(477.5)
(5,834.1)
(5,356.6)
(6,231.5)
(5,834.1)
2020
£m
2019
£m
(1,251.9)
(1,120.1)
(5,058.5)
(4,820.5)
(122.7)
(112.2)
48.6
60.4
92.6
39.6
37.1
142.0
(6,231.5)
(5,834.1)
Operational cash flow (see note 44) was £888.5 million
(2018/19: £826.3 million) mainly due to higher PBIT, depreciation
and amortisation and our increase in working capital was lower
than the previous year.
Our biggest year of capital investment in more than a decade led to
cash capex (see note 44) of £799.5 million (2018/19: £769.3 million).
In 2018/19 the acquisition of Agrivert resulted in a net cash outflow
of £50.9 million and we also repaid £63.0 million of debt that was
acquired with the business.
Our net interest payments were higher at £184.2 million
(2018/19: £161.6 million). Our net tax payments were £33.9 million,
an increase of £12.6 million, largely due to the acceleration of quarterly
instalment payments introduced by the government this year.
We received £9.6 million (2018/19: £11.1 million) from the exercise
of options under the employee Save As You Earn share scheme
and our dividends paid increased in line with our policy.
These cash flows, together with accounting adjustments to the
carrying value of debt, resulted in an increase of £397.4 million
in net debt (2018/19: £477.5 million).
At 31 March 2020 we held £48.6 million (2019: £39.6 million) in net
cash and cash equivalents. Average debt maturity was around
13 years (2019: 14 years). Including committed facilities, our cash
flow requirements are funded until January 2022.
Net debt at 31 March 2020 was £6,231.5 million (2019: £5,834.1 million)
and balance sheet gearing (net debt/net debt plus equity) was 83.4%
(2019: 83.3%). Group net debt, expressed as a percentage of estimated
Regulatory Capital Value at 31 March 2020 was 64.9% (2019: 63.0%)
and Severn Trent Water Group RCV gearing was 64.4% (2019: 62.3%).
The estimated fair value of debt at 31 March 2020 was £951.8 million
higher than book value (2019: £1,219.6 million higher). The decrease
in the difference to book value is largely due to higher credit spreads
at the balance sheet date.
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CONTINUED
Our policy for the management of interest rates is that at least 40% of our borrowings in AMP6 should be at fixed interest rates, or hedged
through the use of interest rate swaps or forward rate agreements. We continue to carefully monitor market conditions and our interest rate
exposure. Given the flatness of the yield curve we believe it is appropriate to reduce our exposure to floating rates of interest. At 31 March 2020,
64% of our gross debt of £6,433.1 million was at fixed rate, 12% was in floating and 24% was index-linked. In March 2020 we raised £200 million
at fixed rates of interest through a US Private Placement.
Our long-term credit ratings are:
Long-term ratings
Moody’s
Standard and Poor’s
Severn Trent
Plc
Seven Trent
Water
Baa2
BBB
Baa1
BBB+
Outlook
Stable
Stable
We invest cash in deposits with highly rated banks and liquidity funds. We regularly review the list of counterparties and report to the Treasury Committee.
Pensions
We have three defined benefit pensions arrangements, two from Severn Trent and one from Dee Valley Water. The Severn Trent schemes are
closed to future accrual.
The most recent formal actuarial valuations for the Severn Trent schemes (‘the Schemes’) were completed as at 31 March 2019. The agreement
reached with the Trustee for the STPS, which is by far the largest of the schemes, included:
– Inflation-linked payments of £15.0 million per annum through an asset-backed funding arrangement, potentially continuing to 31 March 2031,
although these contributions will cease earlier should a subsequent valuation of the STPS show that these contributions are no longer needed;
– Payments under another asset-backed funding arrangement of £8.2 million per annum to 31 March 2032; and
– Deficit reduction payments totalling £32.4 million increasing in line with inflation through to 31 March 2027.
In addition to these payments, the Company will directly pay the annual PPF levy incurred by the STPS (£1.4 million in 2019/20).
The Schemes have entered into additional hedging arrangements to reduce the impact of fluctuations in interest rates and inflation on the
Schemes’ liabilities without adversely impacting the expected return from the Schemes’ assets.
Hafren Dyfrdwy participates in the Dee Valley Water Limited Section of the Water Companies Pension Scheme (‘the Section’). The Section funds
are administered by trustees and are held separately from the assets of the Group. The Section is closed to new entrants. The most recent
formal actuarial valuation of the Section was completed as at 31 March 2017 and as a result deficit reduction contributions to the Section ceased.
On an IAS 19 basis, the net position (before deferred tax) of all of the Group’s defined benefit pension schemes was a deficit of £234.0 million
(2019: £452.9 million). To calculate the pension deficit for accounting purposes, we are required to use corporate bond yields as the basis for
the discount rate of our long-term liabilities, irrespective of the nature of the scheme’s assets or their expected returns.
On an IAS 19 basis, the funding level has improved to 91% (31 March 2019: 84%).
The movements in the net deficit during the year were:
At start of the year
Amounts credited/(charged) to income statement
Actuarial (losses)/gains taken to reserves
Net contributions received and benefits paid
At end of the year
Fair value of
scheme assets
£m
Defined benefit
obligations
£m
2,418.9
(2,871.8)
54.8
(0.4)
(59.2)
(69.5)
187.8
105.4
Net deficit
£m
(452.9)
(14.7)
187.4
46.2
2,414.1
(2,648.1)
(234.0)
During the year lower inflation expectations had been largely offset by lower discount rates. However, at the year end we saw an increase in
corporate bond yields resulting in a higher discount rate than would have applied earlier in the year, which in turn led to a reduction in the net deficit.
Dividends
In line with our AMP6 policy to increase the dividend by at least RPI+4% each year, the Board has proposed a final ordinary dividend of 60.05 pence
per share for 2019/20 (2018/19: 56.02 pence per share). This gives a total ordinary dividend for the year of 100.08 pence (2018/19: 93.37 pence).
In January we announced that our dividend policy for AMP7 will be growth of at least CPIH.
The final ordinary dividend is payable on 17 July 2020 to shareholders on the register at 12 June 2020.
56
Severn Trent Plc Annual Report and Accounts 2020 RISK MANAGEMENT
R
U
O
K
S
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T
H
C
A
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P
P
A
Risk is all about uncertainty. We recognise
that uncertainty can manifest itself as both
negative and positive impacts. Our goal is to
identify risk, minimise the threats and maximise
the opportunities for the benefit of our customers,
shareholders, employees, supply partners and
the environment.
The Board has overall accountability for ensuring that risk is effectively
managed across the Group. The Board’s mandate includes defining
risk appetite and monitoring risk exposure to ensure significant risks
are aligned with the overall strategy of the Group.
On behalf of the Board, the Audit Committee assesses the effectiveness
of the Group’s Enterprise Risk Management (‘ERM’) process and internal
controls to identify, assess, mitigate and manage risk. Additional
information is set out in the Audit Committee report on page 91.
The Executive Committee reviews strategic objectives and assesses
the level of risk taken in achieving these objectives. This ‘top down’
risk process helps to ensure the ‘bottom up’ ERM process, described
below, is aligned to current strategy and objectives.
The management of risk is embedded in our everyday business
activities. Across the Group, we manage risks within the overall
Governance Framework which includes clear accountabilities,
delegated authority limits and reward policies. These are designed to
provide employees with a holistic view of effective risk management.
Within Severn Trent Water and Hafren Dyfrdwy, our approach to risk
reflects our status as a regulated utility providing essential services
and operating as part of the Critical National Infrastructure for the UK.
The nature of these businesses is such that there are some significant
inherent risks. We have a strong control framework in place to enable
us to understand and manage these risks in accordance with our risk
tolerance and appetite.
In our non-regulated businesses we take a more commercial approach
to risk. In providing products and services for clients who operate in
regulated environments, we take a similar approach to risk as in our
own regulated business.
The principal risks facing the Company are illustrated on pages 58 to 62.
Our Enterprise Risk Management process
We use an established ERM process across the Group to assess and
manage our significant risks. The process is controlled by the Central
ERM team and underpinned by a standardised methodology to ensure
consistency. ERM champions and co-ordinators operate throughout the
business, with support and challenge from the ERM team, continually
identifying and assessing risks in their business units and reporting
on a quarterly basis. Criteria are used to consider the likelihood of
occurrence and potential financial and reputational impacts.
The potential causes and subsequent impact of the risks are documented
to enable mitigating controls to be assessed. This assessment allows
us to put in place effective strategies to remediate defective controls or
implement additional controls.
Business unit information is combined to form a consolidated view of
risk across the Group. Our significant risks form our Group risk profile
which is reported to the Executive Committee for review and challenge.
This is reported to the Audit Committee and Board on a six-monthly basis.
The report provides an assessment of the effectiveness of controls over
each risk and an action plan to improve controls where necessary.
To further enhance our ERM information, we report ‘risk flightpaths’.
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.
In addition, individual risks, emerging risks and overall risk landscape
were also discussed by the Board during the year.
Changing risk landscape
Emerging risks are reviewed frequently as part of our horizon
scanning process. We monitor closely changes in the global risk
landscape as climate change and the environment continue to be
key areas of risk focus. Building resilience to climate related risks
is of key importance to the water sector and we constantly review
how our business risks reflect and work towards this.
By the nature of what we do several of our Principal Risks have a
sustainability focus, and we monitor our social and environmental
impacts with the same rigour as our broader performance.
This year we have introduced a Strategic Risk Forum to help provide
a strategic lens and review of, our existing and emerging risks.
The findings of the Forum will help guide emerging risk discussions
and ensure existing risks are continually peer reviewed.
Risk appetite
The Board keeps the relationship between our strategic ambitions
and the management of risk under continual review. The ERM process
establishes target risk positions for each of our significant risks.
The Board formally discusses the progress towards this position
and the mitigating actions being undertaken every six months.
Financial risks
Like all businesses, we plan future funding in line with business need.
This is part of our normal business planning process. The Board receives
regular updates relating to funding, solvency and liquidity matters
through the Treasury Committee so we can respond quickly to any
changes in our ability to secure financing (see Principal Risk 10). The
Pension Fund Trustees and Company regularly monitor our pension
deficit, with advice from investment managers and actuarial advisers.
An annual pension fund review paper is tabled to the Board, updating
it on fund performance and proposed initiatives to manage down
pension liabilities and further balance pension risks (see Principal Risk 9).
The ERM process and relevant risk assessments are factored into
the ‘stress testing’ to assess the Group’s prospects as part of our
long-term viability statement.
Sustainability risks
Sustainability risks are treated in the same way as all our other
Company risks, captured at a local level by responsible teams
and managed centrally through our established ERM process.
By the nature of what we do, several of our principal risks have a
sustainability focus, and we monitor our social and environmental
impacts with the same rigour as our broader performance.
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PRINCIPAL RISKS
OUR PRINCIPAL
RISKS
The Directors have carried out a robust assessment of the principal risks facing the
Company, including those that would threaten its business model, future performance,
solvency or liquidity. For each risk we state what it means for us and what we are doing
to manage it.
1 CUSTOMER PERCEPTION
WHAT IS THE RISK?
WHAT ARE WE DOING TO MANAGE THE RISK?
We may be unable to improve and
maintain our levels of customer
service sufficiently to deliver what
our customers tell us they want.
Understanding what our customers want is key to managing this risk. Our PR19 Severn
Trent Water business plan was shaped by consulting with 32,000 customers, evaluating
24,000 complaints and analysing seven million contacts on social media. As one of only
three companies to be fast-tracked, we see this as a firm endorsement of our customer-
focused approach.
WHAT DOES IT MEAN FOR US?
We are a regulated utility providing essential
services to our customers. We recognise
that our customers increasingly expect
more from us and demand an improved
and more consistent experience. As other
industries improve their levels of service,
the bar continues to be raised.
Failure to deliver the service that customers
expect will lead to customer dissatisfaction.
This may result in financial reward or
penalties under Ofwat’s new Customer
Experience (‘C-MeX’) measure, and
associated ODI outturn.
We recognise there is work to do to continue to improve our C-MeX performance which
replaces the previous AMP6 Service Incentive Mechanism (‘SIM’) from March 2020. Shadow
year for C-MeX indicates our overall performance is ahead of forecast. Our retail performance
remains strong. We have a full programme to deliver the required improvements.
The Retail Transformation Programme continues to deliver a number of initiatives
focused on customer experience. Future initiatives include further ‘Customer First’
interventions for customers with a complaint and those whose situation makes them
vulnerable. Customers continue to tell us they are delighted when we are able to
complete issues for them at point of contact and we will continue the work to improve
our point of contact resolution.
Our drive to digital strategy focuses on continued demand reduction and a shift to
digital channels making it easy for customers to self-serve through a channel of their
choice. Future initiatives look to broaden the remit of our award winning chat-bot ‘Juno’,
increase the number of paperless communications we make to customers as well as open
new digital customer channels. More than 2 million customers are now signed up to our
online offerings and, during the last year, our web self-serve platform handled more than
2.3 million transactions.
We have accelerated our programmes in light of COVID-19 and picked up additional
activity to support a new population of vulnerable customers.
MOVEMENT
2 LEGAL AND REGULATORY ENVIRONMENT
WHAT IS THE RISK?
WHAT ARE WE DOING TO MANAGE THE RISK?
With the acceptance of our PR19 Final Determination we now have more certainty about
the next five-year AMP period running from 2020-25.
The impact of COVID-19 has seen a number of changes in relation to the business retail
market. We continue to engage proactively with Ofwat and MOSL to ensure that they do not
materially change the risk profile of our wholesale business and support the retail market.
Alongside retail market engagement, we will continue to be an active participant in
conversations about the future shape of the regulatory regime to best serve our
customers in the future.
We continue to engage with the Government, MPs, the Welsh Government, regulators
and other stakeholders about the future shape and direction of the water sector. The
renationalisation of the water industry remains a possibility should a future Government
adopt such a policy. Any associated changes in Government policy may fundamentally impact
our ability to deliver the Group’s strategic objectives, impacting shareholder value. Our aim is
to ensure the water sector in England and Wales continues to deliver a world class service
for customers, is able to invest for the future and maximises the benefits to wider society all
stakeholders through the social and environmental benefits the current model allows us to
deliver. We seek to minimise potential risk and maximise opportunities through regular
communication and robust scenario planning as Government policy evolves.
We may be unable to effectively
anticipate and/or influence future
developments in the UK water
industry resulting in our business
plans becoming unsustainable.
WHAT DOES IT MEAN FOR US?
The regulated business operates in a
highly regulated environment. Whilst
we are broadly content with the direction
of changes proposed for our industry in
Ofwat’s new strategy, there remains a risk
that additional future changes could have
a significant impact on Severn Trent. The
renationalisation of the water industry could
remain a central policy of the Opposition,
and, therefore remains a possibility in the
event of a change of Government. In the
event of renationalisation, there is a
possibility that the Group’s regulated
businesses (Severn Trent Water and
Hafren Dyfrdwy) are acquired at below
the value currently implied in Severn
Trent Plc’s share price.
MOVEMENT
58
Severn Trent Plc Annual Report and Accounts 2020 Key
Increase in net risk exposure
No change in net risk exposure
Decrease in net risk exposure
3 LEGAL AND REGULATORY ENVIRONMENT
WHAT IS THE RISK?
WHAT ARE WE DOING TO MANAGE THE RISK?
The regulatory landscape is complex
and subject to ongoing change. There
is a risk that processes may fail or that
our processes may not effectively keep
pace with changes in legislation
leading to the risk of non-compliance.
WHAT DOES IT MEAN FOR US?
Our policies and processes must reflect the
current legal and regulatory environment
and all relevant employees must be kept
aware of new requirements. The Group,
as a whole, may face censure for non-
compliance in an individual Group company
or a specific region in which we operate.
We specifically continue to engage with the Government, MPs, the Welsh Government,
regulators and other stakeholders about the future shape and direction of the water sector.
Our established governance framework, engagement with customers and stakeholders,
policies, supported by internal controls, guidance and training ensure our ongoing
compliance with all applicable laws and regulations including Competition Law and
the General Data Protection Regulation (‘GDPR’), for the operation of separate Wholesale
and Retail business and between our Group businesses.
Our control frameworks are subject to regular review to take account of changes to
legislation, regulation and our business. This is particularly relevant in relation to COVID-19
where there have been a number of changes to market codes to support the business retail
market. We work closely with Ofwat and MOSL to shape and understand all developments.
Any changes to the legal and regulatory environment are captured as emerging risks
through our ERM process with identified owners and action plans to ensure compliance
when the changes come into effect. More detail on our emerging risks can be found on
page 63. Our external legal advisers also provide detailed reviews in respect of upcoming
legislation that may affect the Group. Any applicable legislation is reported to the Executive
Committee and Board with communication across the business as required.
MOVEMENT
4 OPERATIONS, ASSETS AND PEOPLE
WHAT IS THE RISK?
WHAT ARE WE DOING TO MANAGE THE RISK?
We may experience loss of data or
interruptions to our key business
system as a result of cyber attacks.
WHAT DOES IT MEAN FOR US?
The risks arising from loss of one or more of
our major systems or corruption of data held
in those systems could have far reaching
effects on our business. We have recognised
the increasing threats posed by the possibility
of cyber attacks on our systems and data.
Whilst this threat can never be eliminated
and will continue to evolve, we are focused
on the need to maintain effective mitigation.
We continue to commit significant resources and financial investment to maintain the
integrity and security of our assets and data. We follow guidance from the National Cyber
Security Centre and have defence through multiple layers of software and processes
including web gateways, filtering, firewalls, intrusion and advanced threat detection.
We have strengthened our security and network operations capability this year and have
improved the controls around third party access to our systems and data. We have reviewed
our cyber risk methodology and are using this to prioritise future investment to ensure that
we protect ourselves in-line with GDPR, Network and Information Systems Regulation and
Payment Card Industry Data Security Standard (‘PCI DSS’) best practices. We have also
participated in a number of internal cyber security incident exercises to test our response
capability to cyber attacks. There has been no material change in the net risk exposure.
There has been an increase in cyber-related events nationally and globally during the
COVID-19 pandemic, however, there have been no material instances impacting our Group
operations. We maintain robust cyber defences and additional reminders have been issued
to colleagues to remain vigilant.
MOVEMENT
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CONTINUED
5 OPERATIONS, ASSETS AND PEOPLE
WHAT IS THE RISK?
WHAT ARE WE DOING TO MANAGE THE RISK?
We may fail to meet our regulatory
targets in the round, including targets
from Ofwat, in relation to operational
performance of our assets resulting
in regulatory penalties.
WHAT DOES IT MEAN FOR US?
In AMP7, Ofwat is setting targets on an
upper quartile basis. If we are unable to
meet operational performance targets, we
may be subjected to significant regulatory
penalties within the current price review
period, or applied to the next price review.
Regulatory targets apply to all of our water
treatment, distribution, sewerage and
sewage treatment assets. Measures are
in place in relation to water quality,
continuous supplies, sewer flooding,
sewer collapses and pollution events.
We have significantly improved our performance on water measures this year. This
demonstrates that our approach, including tracking leading measures at our comm
cells and at performance meetings, is working.
Performance on supply interruptions has improved through our ‘Prevent, Restore, Repair’
strategy which focuses on preventing asset failure where possible, and restoring supply at
speed if this happens. On leakage, we’ve continued to use innovative ways of finding leaks
faster and fixing them more efficiently. We’ve also maintained performance on many of our
waste water measures, but the revised targets accepted as part of waste water ODI uncapping
in December 2018, meant we were in penalty on our flooding measures this year. We have
improvement plans in place and will continue to use our outcomes to resources approach
to ensure we undertake the right operational interventions to improve performance.
AMP6, the largest ever period of capital investment for Severn Trent has now concluded.
ODIs such as Birmingham Resilience and the Water Framework Directive have been
successfully delivered, as well as mains renewal activity and the strategic sewer upgrade
programme at Newark.
We are closely monitoring the impact of COVID-19 on our operational performance and
our ability to prevent asset failure. To date, we have not experienced a material increase
in this risk as a result of the working practice changes we have made.
MOVEMENT
6 OPERATIONS, ASSETS AND PEOPLE
WHAT IS THE RISK?
WHAT ARE WE DOING TO MANAGE THE RISK?
Failure of certain key assets or
processes may result in inability
to provide a continuous supply of
clean water to large populations
and take waste water safely away
within our area.
WHAT DOES IT MEAN FOR US?
Some of our assets are critical to the
provision of water to large populations
for which we require alternative means
of supply. Examples of risk include the
failure of one of our reservoirs or water
treatment works. These assets are
regularly inspected and maintained and
our assessment of the overall condition
of these assets is good. Other examples
are our IT, telephony systems and remote
monitoring systems which are also key
to our operations.
Our delivery plan for 2020 to 2025 includes significant investment to improve the resilience
of our assets. Our approach to system planning is building on this investment to create
more redundancy and to develop more options for responding to events. The plan is to
have system plans for all of our control groups by summer 2022.
We recognise there are areas where our performance is not as consistent as we would like
and are committed to improving these. We are continuing our Cleanest Water Plan which
drives the delivery of our inspection, cleaning and repair of storage tanks, increasing our
capital maintenance interventions, optimising our operation and maintenance tasks and
formalising our processes, standards and operating procedures involved in delivering
clean water. Building on the success of the Asset Management Framework and its
implementation in operations through OEE approaches, we are moving towards more
predictive and proactive solutions and so reducing the need for reactive response.
Coupled with the evolution of the Asset Health Dashboard, this will enable better targeting
and prioritisation of our intervention. Our response to failures in supply such as burst
mains has been greatly enhanced and we are now able to reach the site and initiate
recovery plans much quicker than in previous years.
MOVEMENT
60
Severn Trent Plc Annual Report and Accounts 2020 Key
Increase in net risk exposure
No change in net risk exposure
Decrease in net risk exposure
7 OPERATIONS, ASSETS AND PEOPLE
WHAT IS THE RISK?
WHAT ARE WE DOING TO MANAGE THE RISK?
Due to the nature of our operations
we could endanger the health and
safety of our people, contractors
and members of the public as well
as negatively impact our local and
wider environment.
WHAT DOES IT MEAN FOR US?
The nature of our assets, operations and
business are such that threats to the safety
of our employees, contractors, customers
and the wider public exist. Operational
failures or negligence could result in
damage to the environment.
We are responsible for a large estate
of assets and have to secure these
from unauthorised access to ensure
our operations are not impacted nor
the safety of the public compromised.
MOVEMENT
We have a well-established Health, Safety and Wellbeing Framework to ensure all of our
operations and processes are conducted in compliance with Health and Safety legislation
and in the interests of the safety of our people and our contractors. We have reviewed our
Framework and processes in the light of COVID-19 and have revised working practices to
ensure we keep people as safe as possible while delivering our essential services.
Our Goal Zero policy clearly sets out our target that no one should be injured or made
unwell by what we do. We experienced no major safety incidents and no fatalities in the
last 12 months, with a 33% improvement in Lost Time Incidents (‘LTIs’) this year. We have
also refreshed our strategy and have targeted interventions in the four main hazard areas
causing us most harm.
We have made a number of ODI commitments to protect our local environment, including
river water quality, pollution incidents, biodiversity improvements and environmental
compliance. In AMP6 we delivered our largest ever environmental programme. This
programme is supported by our customers who want to see us do more to improve river
water quality. During the year we completed a number of environmental programmes
including those under the Water Framework Directive, which helped deliver 1,600 km of
river quality improvements. We anticipate achieving 4* EPA status from the Environment
Agency, reflecting our strong performance across the range of measures it uses to assess
the impact we have on the environment.
We recognise the impact our operations have on the wider environment and we want to
reduce our carbon footprint by seeking lower carbon ways of operating our business, driving
energy efficiency and generating renewable energy. We now generate the equivalent of 51% of
our energy needs, with our remaining electricity now sourced from 100% renewable sources.
During the year we were re-certified by the Carbon Trust – the 11th consecutive year we have
achieved this standard. This verifies that we have sound carbon management processes in
place and are reducing carbon emissions year-on-year.
8 OPERATIONS, ASSETS AND PEOPLE
WHAT IS THE RISK?
WHAT ARE WE DOING TO MANAGE THE RISK?
Climate change is well-embedded in our long-term planning. We are better placed than
many other businesses to understand, and plan for, the potential impacts of climate change.
As part of our Water Resources Management Plan (‘WRMP’) process, we model multiple
climate projections in order to design new sources to offset any supply risk resulting from
climate change. Similarly, our Drainage and Wastewater Management Plan (‘DWMP’)
enables strategic planning for the management of waste water.
Extreme Weather
Adapting to climate change and being able to cope with more frequent extreme weather
events is essential to ensure we can maintain a great service to our customers. We have
applied the learnings from the Freeze Thaw event and prolonged hot, dry summer event
in 2018. Our contingency and future investment plans have been reviewed using ‘Extreme
Flood Outline’ data following the 2015/16 flooding events. All activity has further informed
our incident response and contingency plans.
Climate Change
Our approach to climate change focuses on both mitigation and adaptation, as outlined in
our Triple Carbon Pledge and Science-Based Targets commitment. Our climate change
adaptation report, considered at Board level, sets out our review of climate change risks
across all aspects of our service delivery and sets out detailed plans to make further
progress in building climate resilience.
We’re also taking a national perspective by working with other water companies to develop
an interconnector that can move water quickly from the wetter North to the drier South,
enhancing water resilience across the UK.
We are unable to deal with the impact of
extreme and unpredictable weather
events on our assets and infrastructure
and/or are unable to successfully plan
for future water resource supply and
demand due to climate change.
WHAT DOES IT MEAN FOR US?
Climate change is one of the greatest
challenges our society will face this century.
As a company providing an essential service
drawn from nature, we know that our sector
is particularly vulnerable to the effects
of climate change. Climate change (hotter
and drier summers, wetter winters and
increased storminess) could result in an
inability to meet customer demand, lower
river levels, decreased raw water quality,
flooding of our water or waste works, sewer
capacity being exceeded and increased land
movement. Climate change could also be a
multiplying factor for several of our principal
risks – 1, 5, 6 and 7 detailed above. This
challenge will only grow in the longer term.
Climate change also presents some
opportunities we look to maximise,
such as aquifer recharge and increased
biological treatment.
MOVEMENT
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CONTINUED
Key
Increase in net risk exposure
No change in net risk exposure
Decrease in net risk exposure
WHAT ARE WE DOING TO MANAGE THE RISK?
With the Company’s support, the Pension Trustee has introduced additional hedging
arrangements to reduce the impact of fluctuations in interest rates and inflation on the
Schemes’ liabilities without adversely impacting the expected return from the Schemes’ assets.
On an IAS 19 basis, the net position (before deferred tax) of all the Group’s defined benefit
pension schemes was a deficit of £234.0 million (2019: £452.9 million). To calculate the
pension deficit for accounting purposes, we are required to use corporate bond yields
as the basis for the discount rate of our long-term liabilities, irrespective of the nature
of the Schemes’ assets or their expected returns.
WHAT ARE WE DOING TO MANAGE THE RISK?
9 FINANCIAL
WHAT IS THE RISK?
Lower interest rates, higher inflation or
underperforming equity markets may
require us to provide more funding for
our pension schemes.
WHAT DOES IT MEAN FOR US?
Our largest defined benefit fund has a
significant deficit between the present value
of its assets and liabilities. We have agreed
the triennial actuarial valuation as at
31 March 2019 and as a result agreed to
increase deficit repair payments for the next
three years to approximately £55 million per
annum. But we also continue to run a degree
of investment risk within the scheme in
order to further reduce the deficit. As such,
we are exposed to market movements that
may result in our deficit not falling as rapidly
as the Trustee or the Pension Regulator
consider acceptable. This may lead to
requests for additional repair payments
above the agreed amounts, reducing the
amount of cash available for shareholder
distributions, debt reduction or
reinvestment in the business.
MOVEMENT
10 FINANCIAL
WHAT IS THE RISK?
We are unable to fund the business
sufficiently in order to meet our
liabilities as they fall due.
We have maintained compliance with our Board approved liquidity policy of ensuring at
least 18 months’ liquidity – with liquidity to early 2022. We have been active in the Euro
Medium Term Note (‘EMTN’) market, increased our committed bank facilities and have
accessed the GBP public bond market over the course of the last 12 months.
WHAT DOES IT MEAN FOR US?
We must ensure sufficient liquidity
is available to meet our near-term
financial commitments. We have a
significant funding requirement in AMP7,
to fund our investment programme
and refinance maturing debt. This is a
well-controlled risk, but it is important
that we maintain these high standards
to mitigate this risk.
The Group also completed its first debt issue under the Sustainable Finance Framework
in March 2020 with a £200 million USPP debt issue by Severn Trent Plc. This demonstrates
we are able to replace the European Investment Bank as a source of financing as a result
of the UK’s departure from the European Union. We are actively looking to other capital
markets to diversify further our sources of funding.
We are closely monitoring the potential economic impacts of COVID-19, in particular
financing and liquidity. This activity included modelling plausible and extreme scenarios to
determine expected impacts and test the Group’s financial resilience. Additional detail can
be found in our viability statement on page 66. Our modelling shows that, while there will be
a financial impact, neither the plausible of extreme scenarios we have modelled would
result in an impact to the Group’s expected liquidity, solvency or debt covenants that could
not be addressed by mitigating actions, and are therefore not considered threats to the
Group’s financial resilience. However, there remains a risk that the impact of COVID-19
is greater than that modelled by the Group.
MOVEMENT
62
Severn Trent Plc Annual Report and Accounts 2020
EMERGING RISKS
EMERGING
RISKS
We continually identify and monitor emerging risks through our
network of ERM co-ordinators, ERM champions and risk owners and
through cross-functional workshops at all levels of the organisation
using tools such as horizon scanning and PESTLE analysis. This
culminates with an emerging risk horizon map reported annually
to the Audit Committee and Board. We define emerging risks as
upcoming events which present uncertainty but are difficult to assess
at the current stage. Emerging risk management ensures these
risks are identified and helps to ascertain whether we are adequately
prepared for the potential opportunities and threats they pose.
It aims to identify new and changing risks at an early stage and
analyse them thoroughly to deduce the potential exposure to Severn
Trent. We closely monitor emerging risks and, with time, they may
become fully fledged ERM risks or be incorporated into existing
ERM risks (as potential causes) as we learn more. In some cases,
the emerging risks are superseded by others or cease to be relevant
or applicable as the internal and external environment in which we
operate evolves. The Directors have carried out a robust assessment
of the Company’s emerging risks and consider the following to be
risks that have the potential to increase in significance and affect
the performance of the Group:
Title
Detail
Area / Factor
Time Horizon
Macroeconomic
Uncertainty
– Increased macroeconomic uncertainty throughout and
post-COVID-19 and post Brexit transitionary period.
Economic
Medium
Performance
Challenges
– AMP7 presents new, challenging ODIs with demanding
performance targets. The greater disaggregated regulatory
reporting framework means we have to adapt to meet our
ambitions over the next five years.
Operational
Medium – Long
Biodiversity
– A predicted consequence of climate change is the reduction of
species diversity. We may have to manage the impact of invasive,
non-native species within the habitats we manage and interact
with in our operations.
Environmental
Long
Energy
Security
– Despite the UK having a reliable energy system with electricity
supply from a diverse range of sources, a major power disruption
occurred in August 2019 and the knock-on impacts for energy
users were significant. To increase our resilience to such events,
we are exploring ways to increase our self-generation capability
from renewable energy sources. These are being investigated as
part of our Climate Change Adaptation Strategy.
Technology
Medium
Micro plastics
– Understanding and addressing the impact of micro plastics –
including on natural resources and customers.
Health, Safety and
Environmental
Medium
HS2
– Direct impact on operational sites along the proposed route
and the indirect impact on labour availability in the area.
Operational
Medium – Long
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Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information EMERGING RISKS
CONTINUED
All modelled scenarios generate outcomes consistent with, and
within, the parameters used to support our published viability
statement on page 66.
Our modelling to date shows that, while there will be a financial
impact, neither the plausible or extreme scenarios we have
modelled would result in an impact to the Group’s expected
liquidity, solvency or debt covenants that could not be addressed
by mitigating actions, and are therefore not considered threats
to the Group’s financial resilience.
Our priority remains the health and safety of our people and
customers, and we are taking all possible actions to support
them whilst continuing to deliver our essential services.
The Board continues to receive at least weekly updates on the
Group’s COVID-19 response in order to assess, monitor and
promptly respond to the evolving impact of COVID-19 on our
operations and business, including impacts for all of our
stakeholders.
Progress during the Brexit transition phase and trade negotiations
will continue to be monitored and the risks and uncertainties will
be managed through our existing ERM process.
COVID-19
STATEMENT
At the time of writing, the COVID-19 global pandemic continues to
dominate the focus of the world. Whilst global pandemics have not
previously been noted as a principal risk, they do feature on our
horizon scanning and many of the associated risks are captured
within our ERM framework.
Management continues to assess the impact of COVID-19 on the
Company’s operations and finances. Internal Strategic and Tactical
Incident Teams were established, comprising Executive Committee
members, to lead the swift implementation of contingency plans
and continuously monitor plans in response to the rapidly-changing
situation. You can read more on our COVID-19 response governance
framework on page 10.
We have modelled plausible and extreme scenarios to determine
expected impacts and test our financial resilience. The modelled
outcomes are based on regularly updated assumptions, including:
– The longevity of the incident (initial lockdown and recovery) –
using latest Government advice;
– The expected macroeconomic impacts of the incident
(GDP, inflation and unemployment rates) using independent
economic forecasts;
– The impact on household bad debt rates, using our experience
during previous recessions;
– An estimate of incremental operating costs both during the incident
and in the recovery phase, required to ensure service levels are
maintained, using our experience of previous incidents; and
– The impact on our revenues in 2020/21 and subsequent years,
based on the expected revenue true-up mechanisms in the
regulatory model.
BREXIT
STATEMENT
We continue to monitor and prepare for various scenarios relating
to the customs exit of the UK Brexit plan. Despite uncertainty on
timescales and details of agreements we remain confident that
Brexit does not give rise to new principal risk for the Group and
the risk has materially reduced since the terms of Brexit were
resolved and the UK formally left the EU on the 31 January 2020.
Preparations are well advanced at a company and industry level but
it has been agreed to pause industry plans through the Water UK
co-ordinated group, called the Operations Strategy Group. This will
reconvene subject to Government timelines but it is not envisaged
that there are likely to be any significant risks not previously
considered as part of the ’No Deal’ preparations. Progress in the
Brexit negotiations will continue to be monitored and the risks and
uncertainties will be managed through our existing ERM process.
64
Severn Trent Plc Annual Report and Accounts 2020 NON-FINANCIAL INFORMATION
NON-FINANCIAL
INFORMATION STATEMENT
This section of the Strategic report constitutes the non-financial information statement of Severn Trent Plc, produced to comply
with sections 414CA and 414CB of the Companies Act. The information listed in the table below is incorporated by cross reference.
Reporting requirement
Policies and standards which govern our approach
Additional information and risk management
STAKEHOLDERS
– Customer policy
– Group data protection policy
– Group commercial policy
ENVIRONMENTAL
MATTERS
– Group environment policy
EMPLOYEES
– Group health, safety and wellbeing policy
– Group speak up policy
RESPECT FOR HUMAN
RIGHTS
– Modern Slavery Statement
ANTI-CORRUPTION
AND ANTI-BRIBERY
– Group financial crime and anti-bribery and
anti-corruption policy
– Group conflicts of interest policy
– Group security policy
– Group competition and competitive information policy
SOCIAL MATTERS
– Doing The Right Thing
– Group environment policy
– Customer policy
DESCRIPTION OF
PRINCIPAL RISKS
AND IMPACT OF
BUSINESS ACTIVITY
Stakeholder engagement, pages 24 – 27
s.172 statement, pages 28 – 29
Board activities, pages 79 – 80
Sustainability disclosure, pages 16 – 19
Corporate Sustainability Committee report,
pages 99 – 101
Sustainability report, pages 12 – 28
Employee engagement, page 20
Our people, page 20
Our Purpose and Values, page 14
Our culture, page 14
Gender Pay Gap, page 120
Governance report, pages 69 – 129
Audit Committee report, pages 91 – 96
Modern Slavery Act, page 99
Corporate Governance report, pages 69 – 129
Corporate Sustainability Committee report,
pages 99 – 101
Corporate Governance report, pages 69 – 129
Audit Committee report, pages 91 – 96
Sustainability disclosure, pages 16 – 19
Corporate Sustainability Committee report,
pages 99 – 101
Directors’ report, pages 124 – 128
Sustainability report, pages 32 – 44
Risk overview, page 57
Principal risks, pages 58 – 62
Business model, pages 6 – 7
DESCRIPTION OF THE BUSINESS MODEL
Business model, pages 6 – 7
NON-FINANCIAL KEY PERFORMANCE INDICATORS
Strategic report, pages 1 – 68
Key Performance Indicators pages 32 – 33
The policies mentioned above form part of Severn Trent’s Group policies, which act as the strategic link between our Purpose and Values
and how we manage our day-to-day business. During the year, the Directors approved the relaunched Doing the Right Thing and supporting
Group policies, and it was determined that the policies remain appropriate, are consistent with the Company’s values and support its long-term
sustainable success.
65
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information VIABILITY STATEMENT
ASSESSMENT OF CURRENT POSITION
AND LONG-TERM PROSPECTS
The Directors’ assessment of the Group’s current financial position
is set out in the Chief Financial Officer’s review on pages 51 to 56.
Our principal operating subsidiary is Severn Trent Water, which is a
regulated long-term business characterised by multi-year investment
programmes and relatively stable revenues. The water industry in
England and Wales is currently subject to economic regulation rather
than market competition and Ofwat, the economic regulator, has a
statutory obligation to secure that water companies can (in particular
through securing reasonable returns on their capital) finance the
proper carrying out of their statutory functions. Ofwat meets this
obligation by setting price controls for five-year Asset Management
Periods (AMPs) including mechanisms that reduce the risk of
variability in revenues from the regulated business in the medium
term by adjusting future revenues to balance over or under recovery
compared to the original plan.
AMP6 ended on 31 March 2020 and Ofwat has made its determination
of price controls for Severn Trent Water for the AMP period 2020–25
(AMP7). Severn Trent Water has developed its plans to deliver the
operational and financial performance set out in the Final Determination
and we have based our assessment of prospects for the next five years
on these plans, subject to modifications resulting from the impacts of
the COVID-19 outbreak (see below).
When considering the Group’s prospects beyond 2025, it is necessary
to make assumptions about the price review process for the period
2025–30 (PR24), which will take place in 2024. In making this
assessment we have taken account of:
– Ofwat’s statutory duty to secure that companies can finance the
proper carrying out of their functions;
– Severn Trent Water’s financial structure, which is close to the
Ofwat notional capital structure and our plan to retain this; and
– Severn Trent Water’s plans for AMP7, the successful execution
of which would deliver benefits to all stakeholders and financial
incentives that would help to further strengthen our financial
resilience in the period beyond 2025.
We have significant investment programmes, largely funded through
access to debt markets. Our strategic funding objectives reflect the
long-term nature of the Severn Trent Water business and we seek
to obtain a balance of secure long-term funding at the best possible
economic cost. Our Treasury Policy requires us to maintain sufficient
liquidity to cover cash flow requirements for a rolling period of at
least 18 months in order to limit the risk of restricted access to capital
markets. Our Group Treasury team actively manages our debt maturity
profile to spread the timing of refinancing requirements and to enable
such requirements to be met under most market conditions. The weighted
average maturity of debt at the balance sheet date was 13 years.
We have an established process to assess the Group’s prospects.
The Board undertakes a detailed assessment of the Group’s strategy
on an annual basis and the output from this assessment sets the
framework for our medium-term plan, which we update annually.
Our medium-term plan reflects the Group’s prospects and considers
the potential impacts of the principal risks and uncertainties. We
perform stress tests to assess the potential impact of combinations
of those risks and uncertainties. The plan also considers mitigating
actions that we might take to reduce the impact of such risks and
uncertainties, and the likely effectiveness of those mitigating actions.
Impact of COVID-19 on the Group’s prospects
The Office for Budget Responsibility has identified the water industry
as likely to be amongst the least affected by the COVID-19 outbreak.
But we are not immune to the impacts on the wider economy
and we expect to see a reduction in consumption from non-household
customers following the restrictions implemented by the Government,
and an increase in bad debt costs from household customers, even
after allowing for an increase in the use of our range of social tariffs.
Some independent forecasters are also predicting a sharp reduction
in inflation during calendar years 2020 and 2021 that would impact our
revenue in financial years 2021/22 and 2022/23. We have modelled the
likely impacts on our medium-term plan and developed an updated
assessment of our prospects allowing for the anticipated impacts of
COVID-19 based, inter alia, on the Office for Budgetary Responsibility’s
Reference Scenario published on 14 April 2020, Government advice
and water sector specific guidance from our regulator Ofwat. We
have applied our stress tests, including more severe impacts of the
COVID-19 outbreak, to this adjusted plan. There remains a risk that
the impact of COVID-19 is greater than that modelled by the Group.
Period of assessment
The Board considered a number of factors in determining the period
covered by the assessment. The long-term nature of our principal
business, together with relatively stable revenues and a model of
economic regulation that places a duty on the regulator to secure that
water companies can finance the proper carrying out of their functions,
support a longer period of assessment.
However, the changing nature of regulation of the water industry
increases the uncertainty that is inherent in our financial projections.
We have an established planning and forecasting process and the
Board considers that the assessment of the Group’s prospects is
more reliable if based on an established process. Our latest medium-
term plan extends in detail to the end of the AMP7 period in 2025 with
less detailed projections looking beyond this.
A longer period of assessment introduces greater uncertainty
because the variability of potential outcomes increases as the
period considered extends.
Bearing in mind the long-term nature of our business; the enduring
demand for our services; our established planning process; and the
changing nature of the regulation of the water industry in England and
Wales, the Board has determined that seven years is an appropriate
period over which to assess the Group’s prospects and make its
viability statement this year.
ASSESSMENT OF VIABILITY
In assessing our future prospects, we have considered the potential
effects of risks and uncertainties that could have a significant financial
impact under severe but plausible scenarios. The risks and uncertainties
considered were identified in the Group’s ERM process, which is described
on pages 57 to 64, and from the key assumptions in the financial model.
Where the risk occurs at a point in time we have assumed that it occurs
at the point in the plan with the lowest headroom.
66
Severn Trent Plc Annual Report and Accounts 2020 The scenarios tested are described below.
Scenario tested
Related
principal risk
Mitigating actions
1. A more severe impact from the COVID-19 outbreak
resulting from a prolonged ‘lockdown’ period resulting
in lower economic activity, higher unemployment and
lower inflation
The adjustments that we have made to our medium-term
plan to reflect the anticipated impacts of COVID-19 are
based on a number of assumptions including a ‘lockdown’
period of three months followed by another period of three
months when Government restrictions are partially lifted.
We have modelled longer periods of ‘lockdown’ and a
partial lifting of restrictions of six months each which
might result in more severe impacts on total revenues
and household bad debts, together with a larger and
longer reduction in inflation.
2. An increase in the funding deficit of the Group’s defined
benefit pension schemes
The planned funding for the Group’s defined benefit
pension arrangements is based on current assumptions
for future inflation, asset returns and members’ longevity.
Outcomes adverse to our assumptions could result in
a higher funding deficit. We have assessed the impact
of an increase in cash contributions to the schemes to
£85 million per annum. Contributions are reviewed and
agreed with the Scheme trustee on a triennial basis
with the next valuation of the main scheme based on
the funding position at 31 March 2022.
3. Severn Trent Water experiences a severe climate event,
operational failure or other exceptional event with a very
significant financial impact
The Group’s Enterprise Risk Management process has
identified a number of risks including extreme weather
events, failure of key assets and cyber attacks that might
have a significant impact on the Group’s operational and
financial performance. We have assessed the effects of
an incident with an impact of £300 million.
4. Severn Trent Water underperforms against its
performance commitments
Severn Trent Water operates under a regulatory model
that encourages companies to deliver what customers
want, using performance related rewards and penalties.
Failure to deliver performance at the committed level can
lead to significant penalties. We have assessed the impact
of a penalty equivalent to 3% of one year’s revenue.
Risk 9: Increased
funding for
pension schemes
Risk 4: Cyber
security
Risk 6: Failure
of key assets
Risk 7: Health
and safety and
environmental
impact
Risk 8: Impact of
extreme weather/
climate change
Risk 1: Failure to
deliver what our
customers want
5. Severn Trent Water incurs higher costs than planned
that are not funded
Significant overspending could result in a deterioration in
financial metrics and performance, which might adversely
impact the Group’s solvency. We have assessed the impact
of a 10% overspend on capital and operating expenditure in
each year of the plan.
Risk 2: Changes
in the regulatory
environment for the
UK water industry
6. A combination of scenarios 4 & 5
See above
The regulatory model includes mechanisms to adjust
future revenues to balance out any under recovery
when compared to the original price review. The
application of these mechanisms would necessarily
take into account affordability of customers’ bills and
therefore might be spread into the next AMP period.
Reduce discretionary expenditure to mitigate the
impact of lower revenue in the affected years.
Lower inflation would reduce the finance cost
incurred on index-linked debt.
Consider use of hybrid debt instruments to protect
credit ratings.
Consider a temporary reduction in, or re-phasing
of, dividends.
Discuss impact on debt covenants with lenders
and seek a temporary waiver if necessary.
Consider use of hybrid debt instruments to
protect credit ratings.
Consider a temporary reduction in dividends.
Identify and implement sustainable cost savings
and efficiencies.
Reduce working capital to support cash flow.
Reduce discretionary expenditure to cover
any extra costs resulting from the event.
Consider use of hybrid debt instruments to
protect credit ratings.
Consider a temporary reduction in dividends.
Discuss impact on debt covenants with lenders
and seek a temporary waiver if necessary.
Reduce discretionary expenditure to cover any extra
costs resulting from penalties.
Discuss the impact on debt covenants with lenders
and seek a temporary waiver if necessary.
Reduce discretionary expenditure in the short term.
In the medium term implement a cost reduction
programme to deliver sustainable cost savings
and efficiencies to bring costs back in line with
regulated allowances.
Discuss impact on debt covenants with lenders
and seek a temporary waiver if necessary.
Consider a temporary reduction in dividends.
Reduce discretionary expenditure in the
short term.
Reduce working capital to support cash flow.
Discuss impact on debt covenants with lenders
and seek a temporary waiver if necessary.
Consider a temporary reduction in dividends.
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Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information
VIABILITY STATEMENT
CONTINUED
The combined scenario represents a situation where several of
the severe but plausible scenarios occur simultaneously. In this
situation, the same mitigating actions would be available but their
application would be deeper.
We have significant funding requirements to refinance existing
debt that falls due for repayment during the period under review
and to fund our capital programme. Under all scenarios considered,
the Group would remain solvent and have access to sufficient funds
in normal market conditions. Our Treasury Policy requires that
we retain sufficient liquidity to meet our forecast obligations,
including debt repayments for a rolling 18 month period.
In making its assessment, the Board has made the following
key assumption:
– Any period in which the Group is unable to access capital markets
to raise finance during the period under review will be shorter than
18 months.
On this basis, the stress tests indicated that none of these scenarios,
including the combined scenario, would result in an impact to the
Group’s expected liquidity, solvency or debt covenants that could not
be addressed by mitigating actions and are therefore not considered
threats to the Group’s viability.
GOVERNANCE AND ASSURANCE
The Board reviews and approves the medium-term plan on which this
viability statement is based. The Board also considers the period over
which it should make its assessment of prospects and the viability
statement. The Audit Committee supports the Board in performing
this review. Details of the Audit Committee’s activity in relation to
the viability statement are set out in the Audit Committee report on
page 92. Since the onset of the COVID-19 outbreak, the Board has
received regular and frequent updates of its likely impact and the
results of stress tests based on more severe scenarios.
This statement is subject to review by Deloitte, our external auditor.
The audit report is set out on pages 130 to 136.
ASSESSMENT OF VIABILITY
The Board has assessed the viability of the Company over a seven
year period to March 2027, taking into account the Company’s
current position and principal risks.
Based on that assessment, the Directors have a reasonable expectation
that the Company will be able to continue in operation and meet its
liabilities as they fall due over the period to 31 March 2027.
Going Concern Statement
In preparing the financial statements the Directors considered the Company’s ability to meet its debts as they fall due for a period
of one year from the date of this report. This was carried out in conjunction with the consideration of the viability statement above.
On this basis the Directors considered it appropriate to adopt the going concern basis in preparing the financial statements.
Approval
This Strategic report was approved by the Board.
By order of the Board.
Bronagh Kennedy
Group General Counsel and Company Secretary
19 May 2020
68
Severn Trent Plc Annual Report and Accounts 2020
GOVERNANCE REPORT
Documents available at:
www.severntrent.com
CREATING LONG-TERM
SUSTAINABILITY
’
S
R
I
A
H
C
E
C
N
A
N
R
E
V
O
G
O
T
N
O
I
T
C
U
D
O
R
T
N
– Severn Trent Plc Articles
of Association
– Matters Reserved to the Board
– Charter of Expectations
– Non-Executive Director
Letters of Appointment
– Terms of Reference for
Board Committees
– Board Diversity
Policy Statement
– Modern Slavery Statement
– Tax Strategy and Tax Report
– Group Conflicts of
Interest Policy
– Non-Audit Services Policy
– Doing The Right Thing
I
Andrew Duff
Chair for year ended
31 March 2020
Christine Hodgson
Appointed Chair
on 1 April 2020
Board focus areas in 2019/20
– Appointed Christine Hodgson as Chair Designate and Sharmila
Nebhrajani as Independent Non-Executive Director
– Reviewed the Group’s strategy, five-year plan and budget
– Satisfied itself that workforce policies and practices are
consistent with the Company’s values and culture
– Approved the Severn Trent Plc Dividend Policy for AMP7
– Oversaw the Company’s response to COVID-19
– Considered the Group’s strategy for Environmental Leadership
– Considered Severn Trent’s approach to Climate Change Adaptation
Read more about the key activities of the Board on pages 79 to 80.
Dear Shareholder
The Board announced the retirement of Andrew Duff from the Board,
with effect from 31 March 2020. On behalf of the Board, I am pleased
to introduce the Governance Report for 2019/20. This report seeks to
update you on what the Board focused on for 2020.
During the year ended 31 March 2020, we have been compliant with the
provisions and principles of good governance contained in the 2018 UK
Corporate Governance Code (the ‘2018 Code’). The Board welcomed
the move to simplify the Code, and the greater clarity it brings to how
businesses should transparently report to their shareholders.
We believe good corporate governance is about how we provide
confidence in the delivery of our performance to our stakeholders
and is essential for the long-term sustainable success of our business.
Our aim is to set out in this report how the Board:
– sets the strategy, purpose and values for the Group;
– takes into account the views of our stakeholders, the impact
of our decisions on them and the actions taken as a consequence.
Read more in our dedicated s.172 statement on pages 28 to 29; and
– monitors performance, embeds our values and manages risk.
Being a company you can trust
We have a unique position in society as a company delivering a public
service. We know from our customers that they want us to be a
company that can be trusted and is socially purposeful.
Our business culture is key to ensuring we remain a trusted company.
Our Purpose and Values, which were shaped and established by our
employees, are what bind us together and guide us to act ethically,
because how we go about doing things is just as important as the
decisions we make.
Our Code of Conduct, ‘Doing the Right Thing’, sets out the cultural
norms and behaviour expected of everyone at Severn Trent. Everyone
who works for and with us is required to comply with this. The Board
and Executive Committee also recognise the importance of their
roles in setting the tone for the Company’s culture and that is why
we complete a Doing the Right Thing e-learning course every year,
together with all of our employees.
We have always strived to be a Purposeful Company. This year we
wanted to demonstrate a real commitment of this to our stakeholders
– that’s why the Severn Trent Water Limited Board approved a request
to Ofwat for the adoption of a new Social Purpose licence condition in
our Licence to make it a legally binding obligation.
AMP7 Business Plan & Strategy
As a result of our AMP7 Business Plan being fast-tracked by Ofwat,
we have been able to make an early start on understanding what
we have to deliver. We had a deep dive into our financial budgets
and scrutinised management’s detailed plans to underpin the
successful delivery of AMP7.
At our separate Board Strategy Day, we also considered our carbon
and energy strategy and the legitimacy of our sector, in particular, our
role in demonstrating that we are delivering good-quality services
at a fair price for the long term and not inappropriately taking profits
out of the Company for the short-term benefit of shareholders.
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Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information
CHAIR’S INTRODUCTION TO GOVERNANCE
Stakeholder engagement
We know that businesses are more successful and sustainable
when they balance the needs of their stakeholders. For us as a
Board we pride ourselves on thinking about the impact of our
decisions in their broadest terms and that includes the impact
on all of our stakeholders, including customers, colleagues,
communities, the environment and of course our investors.
We also believe it is important that we report clearly on how we
have taken the views of our stakeholders into account, the impact
of our decisions on them and any actions taken as a consequence.
You can read more in our dedicated s.172 statement on pages 28 to 29.
Board changes
After serving as Chair for nine years, in May 2019 the Board announced
Andrew Duff’s retirement from the Board. Our Nominations Committee,
led by our Senior Independent Director, Kevin Beeston, with support
from the whole Board and our Company Secretary, Bronagh Kennedy,
oversaw the succession and appointment process during the year and
you can read more on how the Nominations Committee undertook its
search ahead of making a recommendation to the Board to appoint a
new Chair of the Board on page 90.
I would also like to extend a personal welcome to Sharmila Nebhrajani
who joined us as an Independent Non-Executive Director from
1 May 2020. Further information can be found in the Nominations
Committee report on page 87.
I was delighted to be appointed as Chair Designate of Severn Trent Plc
on 1 January 2020. It has been a pleasure to work with Andy over the
last few months to ensure we managed an effective handover and
immerse myself in Severn Trent as part of my induction. This spanned
26 days, across 12 sites and I met 230 of our employees to gain a
thorough knowledge and understanding of Severn Trent and our
culture. You can read more about my induction on page 85.
I would like to take the opportunity to thank Andy for his time and help,
but most of all for his true dedication to Severn Trent over the last nine
years. I look forward to building on his legacy.
Looking forward
We will continue as a Board to maintain the highest standards of
corporate governance across the Group to support the delivery of our
strategy, through delivery of our five-year business plan and focus on
our climate change commitments to create long-term sustainable
value. Over the next 12 months we will also be focused on delivering
our challenging social and environmental commitments, as well as
fostering the engagement of our employees and the diverse, inclusive
culture we need to deliver our plans.
Conclusion
We hope you find this report useful and we welcome any suggestions
on how we can add to its qualities in the future along with any
comments you have on the current content.
Christine Hodgson
Chair
19 May 2020
OUR NEW PURPOSE AND VALUES
OUR PURPOSE
TAKING
CARE OF ONE
OF LIFE’S ESSENTIALS
OUR VALUES
DOING THE RIGHT THING
To support the creation of long-term value for the mutual benefit
of our shareholders, employees, customers and communities, the
Board recognises the importance of building and promoting a culture
of integrity and openness, where inclusion and diversity are valued.
At the heart of Severn Trent’s culture is a closely held set of values.
Doing the Right Thing, our Code of Conduct helps us put our values
into practice. Our values and Code of Conduct embody the principles
by which the Group operates and provide a consistent framework for
responsible business practices.
The Board also has oversight of a number of accompanying Group
policies. These policies, together with Doing the Right Thing, codify
how to identify and deal with suspected wrongdoing, fraud or
malpractice; how to ensure that the highest standards of safety
are maintained; and how to apply good ethics and sound judgment.
The Board monitors and assesses the culture of the Group by
regularly meeting with the Executive Committee and management,
and reviewing the outcomes of employee surveys. We believe
that our strong culture is a unique strength and we see the
benefits in employee engagement, retention and productivity.
During the year, the Board has focused on deepening its understanding
of the Group’s culture even further, through a dedicated Company
Purpose and Culture session in January 2020. The session was
centred on the results of our employee survey, ‘QUEST’, and other
relevant data. The Board considered the positive and more challenging
aspects revealed by the survey and discussed the Company’s approach
to addressing areas of employee focus. Members of the Board also
regularly attend the Severn Trent Company Forum, to listen directly
to what employees have to say and for our employees to observe at
first-hand matters that the Board is reviewing and considering.
At Severn Trent, we do not see corporate governance as something
we do because we have to. We choose to see it as something that
should be ingrained in the way we behave, how we make decisions,
how we run our business and ultimately, how we build trust.
70
Severn Trent Plc Annual Report and Accounts 2020 GOVERNANCE AT A GLANCE
GOVERNANCE
AT A GLANCE
HIGHLIGHTS
100.08p
Dividend per share
in 2019; an increase
of 7.2%
100%
Board independence
as at 1 May 2020
56%
Female representation
on our Board as
at 1 May 2020
11%
BAME representation
on our Board as
at 1 May 2020
4.2
Glassdoor ranking
as at 1 May 2020
(out of 5)
100%
Board meeting
attendance
for year ending
31 March 2020
8.1
Employee
engagement score
for 2019/20
(out of 10)
Board changes
The Board spent a significant amount of time considering
succession planning during the year. The Board appointed a new
Non-Executive Chair and a new Independent Non-Executive
Director in accordance with its Board Diversity Policy.
– Andrew Duff retired on 31 March 2020 after nine years as Chair.
– Christine Hodgson was appointed as an Independent Non-
Executive Director on 1 January 2020 and Chair on 1 April 2020.
– Sharmila Nebhrajani joined the Board as an Independent
Non-Executive Director on 1 May 2020.
Read more: Nominations Committee report page 87
Governance improvements
– Dedicated Board session reviewing our risk management
processes, including the risk tolerance of the Group.
– Appointment of a new Head of Internal Audit.
– Launched our new Sustainable Finance Framework.
– New s.172 Board processes implemented – with training
across the Group.
– Review and launch of our Sustainability Framework.
– Changed the name of the Corporate Responsibility Committee
to the Corporate Sustainability Committee to reflect the
increasingly wide scope of its remit.
– Awarded the Fair Tax Mark.
– Our selected method of engaging with the workforce, through
the Company Forum, was enhanced during the year. All Board
members attend the Company Forum on a rotation basis to
understand the views of the workforce. The Board considers
that this is an excellent means of making sure that views
across the organisation are considered in Board discussion
and decision making.
– Updated and approved the Board Committee Terms of Reference.
Major Board decisions
– AMP7 Dividend Policy.
– Seeking to enshrine Social Purpose as a licence condition.
– Scrutinised AMP7 plans, including budget.
– Strategy for environmental leadership.
– Severn Trent’s approach to climate change adaptation.
Read more: Key activities of the Board pages 79 to 80
71
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information BOARD OF DIRECTORS
BOARD OF
DIRECTORS
The collective experience of the Directors and the diverse skills
and experience they possess enables the Board to reach decisions
in a focused and balanced way, supported by independent thought
and constructive debate, crucial to ensuring the continued long-
term success of the Company. Integrity and mutual respect are
the cornerstones of relationships between our Directors, with
a Board dynamic that supports open and honest conversations
to ensure decisions are taken for the benefit of Severn Trent in
full consideration of the impact on all stakeholders.
Christine Hodgson
CBE, BSc (Hons), FCA
Andrew Duff
BSc, FEI
Olivia Garfield
BA (Hons)
James Bowling
BA (Hons) Econ, ACA
Kevin Beeston
FCMA
Chair
N
C
R
Appointed:
Non-Executive Director
on 1 January 2020, Chair
on 1 April 2020.
Skills, competences
and experience:
Outgoing Chair, retired from the
Board 31 March 2020
Chief Executive
Chief Financial Officer
N
C
R
Appointed:
C
D
E
Appointed:
D
E
T
Appointed:
Non-Executive Director on 10 May
2010, Chairman on 20 July 2010.
Chief Executive
on 11 April 2014.
Chief Financial Officer
on 1 April 2015.
Retired: 31 March 2020.
Skills, competences
and experience:
Skills, competences
and experience:
Skills, competences
and experience:
Christine brings extensive board and
governance experience to the Company
as well as a deep understanding of
business, finance and technology
leadership. She is a committed
advocate of the need for companies
to serve all of their stakeholders
effectively and deliver their social
purpose. Until her appointment as Chair
of the Severn Trent Board, she was the
Executive Chair of Capgemini UK Plc,
one of the world’s largest technology
and professional services groups.
Christine joined Capgemini in 1997
and built her career in a variety of roles
including CFO for Capgemini UK Plc
and for the Global Outsourcing
business, CEO of Technology Services
North West Europe and the Global
Head of Corporate Social Responsibility.
Christine was previously an
Independent Non-Executive Director
of Ladbrokes Coral Group PLC until
2017. She is a fellow of the Institute
of Chartered Accountants in England
and Wales.
Other roles:
Andrew’s extensive experience
of international and regulated
business, strategic management
and customer service in high profile,
dynamic environments equipped him
well for the role of Chairman of the
Severn Trent Group. Andrew spent
16 years at BP Plc in marketing,
strategy and oil trading. He joined
National Power in 1998 and the
Board of Innogy Plc upon its
demerger from National Power in
2000. He played a leading role in its
restructuring and transformation
through the opening of competition
in energy markets culminating in its
subsequent sale to RWE in 2003.
He became Chief Executive Officer
of the successor Company and a
member of the RWE Group Executive
Committee until his retirement in
2010. He was a Non-Executive
Director of Wolseley Plc from
July 2004 until November 2013.
Olivia (Liv) brings to the Board a
wealth of experience managing
customer service delivery and
complex infrastructure and
organisations in a regulated
environment. Before joining
Severn Trent, Liv was Chief Executive
Officer of Openreach, part of the
BT Group, where she spearheaded
and oversaw the commercial roll-out
of fibre broadband to two-thirds of
the country. She joined BT in 2002
and held the pivotal roles of Group
Director of Strategy and Regulation,
Managing Director Commercial
and Brands, Global Services and
UK Customer Services Director.
From 1998 to 2002, Liv worked for
Accenture as a consultant in the
Communications and High Tech
Market Unit, designing and
implementing business change
solutions across a number of
industry sectors.
Other roles:
Other roles:
– Non-Executive Chairman
– Non-Executive Director
of Elementis Plc
of Water UK
– Senior Independent Director
of Standard Chartered Plc
– Non-Executive Director of UK
Government Investments Limited
– CEO of the Council for
Sustainable Business
James is a chartered accountant,
who started his career with
Touche Ross and brings significant
financial management, M&A and
business transformation expertise
to the Board. Prior to joining Severn
Trent, James was interim Chief
Financial Officer of Shire Plc, where
he had been since 2005, first as
Head of Group Reporting and from
2008 as Group Financial Controller.
Prior to joining Shire, James spent
nine years at Ford Motor Company
in various finance roles of
increasing responsibility.
James has recent and relevant
financial experience as a member
of the Institute of Chartered
Accountants in England and Wales.
Senior Independent
Non-Executive Director
A
N
R
Appointed:
Independent Non-Executive
Director on 1 June 2016,
Senior Independent Non-Executive
Director on 20 July 2016.
Skills, competences
and experience:
Kevin has a wealth of commercial,
financial and high level management
experience. Previously, Kevin spent
25 years at Serco Plc, where he held
the roles of Finance Director, Chief
Executive and finally Chairman until
2010. Kevin was previously Chairman
of Domestic & General Limited,
Partnerships in Care Limited and
Equiniti Group Plc, and was a
Non-Executive Director of IMI Plc
and Marston Corporate Limited. Until
February 2020, Kevin was Chairman
of Taylor Wimpey Plc, where he had
been on the Board since 2010.
Kevin has recent and relevant
financial experience as a fellow of the
Chartered Institute of Management
Accountants and was previously
Finance Director at Serco Plc.
Other roles:
– Non-Executive Director of the
Football Association Premier
League Limited
– Non-Executive Chairman of
Elysium Healthcare Limited
– Trustee and Member of the
– Member of the CBI President’s
Committee
– Member of the Takeover Panel
and its Hearings Committee
– Fellow of the Energy Institute
– Director of Water Plus
– Senior Trustee of Macmillan
Cancer Support
Limited – joint venture with
United Utilities
– Member of The 30% Club
Board of The Prince of Wales’
Business in the Community
– Chair of The Careers and
Enterprise Company Limited
72
Severn Trent Plc Annual Report and Accounts 2020 Director
Position
Christine Hodgson
Chair (Appointed as an Independent Non-Executive
Director on 1 January 2020 and as Chair on 1 April 2020)
Andrew Duff
Chair (Retired 31 March 2020)
Liv Garfield
Chief Executive
James Bowling
Chief Financial Officer
Kevin Beeston
Senior Independent Non-Executive Director
John Coghlan
Independent Non-Executive Director
Dominique Reiniche Independent Non-Executive Director
Philip Remnant
Independent Non-Executive Director
Angela Strank
Independent Non-Executive Director
Audit
Committee
Corporate
Sustainability
Committee
Nominations
Committee
Remuneration
Committee
Treasury
Committee
–
–
–
–
4/4
4/4
–
4/4
–
1/1
2/32
3/3
–
–
–
2/32
–
3/3
1/1
3/51
–
–
5/5
5/5
5/5
5/5
5/5
2/2
5/61
–
-
6/6
–
–
6/6
6/6
–
–
–
5/5
–
5/5
–
5/5
–
Board
2/2
7/7
7/7
7/7
7/7
7/7
7/7
7/7
7/7
A
C
Audit Committee
Corporate Sustainability
Committee
N
Nominations Committee
R
T
D
E
Remuneration Committee
Treasury Committee
Disclosure Committee
Executive Committee
Denotes Committee Chair
1
2
Andrew Duff did not attend the Nominations and Remuneration Committee meetings in relation to his succession.
Andrew Duff and Dominique Reiniche were unable to attend a Corporate Sustainability Committee meeting due to long-standing commitments.
They were provided with all relevant papers and provided comments on the matters to be considered to the Committee Chair.
John Coghlan
BCom, ACA
Sharmila Nebhrajani
OBE, MA (Hons), ACA
Dominique Reiniche
MBA
The Hon. Philip Remnant
CBE, FCA, MA
Independent
Non-Executive Director
Independent
Non-Executive Director
Independent
Non-Executive Director
A
T
N
Appointed:
A
C
N
Appointed:
C
N
Appointed:
Independent
Non-Executive Director
R
A
N
T
Appointed:
Angela Strank
DBE, FRS, FREng, CEng,
FIChemE, DSc, PhD
Independent
Non-Executive Director
C
N
R
Appointed:
Independent Non-Executive Director
on 23 May 2014.
Independent Non-Executive Director
on 1 May 2020.
Independent Non-Executive Director
on 20 July 2016.
Independent Non-Executive Director
on 31 March 2014.
Independent Non-Executive Director
on 24 January 2014.
Skills, competences
and experience:
Skills, competences
and experience:
Skills, competences
and experience:
Skills, competences
and experience:
Skills, competences
and experience:
Dominique has a wealth of operational
experience in Europe and has
international consumer marketing
and innovation experience. Dominique
started her career with Procter &
Gamble AG before moving to Kraft
Jacobs Suchard AG as Director of
Marketing and Strategy where she
was also a member of the Executive
Committee. Dominique previously
held a number of senior roles at
Coca-Cola Enterprises and at
Coca-Cola Company, including
President – Western Europe,
President – Europe and Chairman –
Europe. Dominique was a
Non-Executive Director of
Peugeot-Citroen SA until December
2015 and was a Non-Executive
Director of AXA SA until April 2017.
Other roles:
– Chair of Eurostar
International Limited
– Chair of CHR Hansen
Holdings A/S
– Non-Executive Director
of Mondi Plc
– Non-Executive Director
of PayPal (Europe)
Philip is a senior investment banker
and brings substantial advisory and
regulatory experience to the Board.
A chartered accountant, he now
holds a number of non-executive
roles. Previously, Philip was Vice
Chairman of Credit Suisse First
Boston Europe and Head of the UK
Investment Banking Department.
Philip was Director General of the
Takeover Panel for two years
between 2001 and 2003, and again
in 2010. He served on the Board of
Northern Rock Plc from 2008 to 2010
and from 2007 to 2012 was Chairman
of the Shareholder Executive.
Philip has recent and relevant
financial experience as a fellow
of the Institute of Chartered
Accountants in England and Wales.
Other roles:
– Senior Independent Director
of Prudential Plc
– Deputy Chairman of the
Takeover Panel
– Chairman of City of London
Investment Trust Plc
– Director and Trustee of St Paul’s
Cathedral Foundation
John has a wealth of experience in
financial and general management.
He spent 11 years at Exel PLC as
Chief Financial Officer and ultimately
as Deputy Chief Executive Officer
until retiring in 2006. Since then,
he has been a Director of publicly
quoted and private companies
across several sectors.
John has recent and relevant
financial experience as a member
of the Institute of Chartered
Accountants in England and Wales.
Other roles:
– Non-Executive Director of
Associated British Ports
Holdings Limited
– Non-Executive Director
of O.C.S. Group Limited
– Non-Executive Director of
Clarion Housing Association
Sharmila brings extensive board and
governance experience, gained in a
variety of roles spanning the private
sector, public sector and NGOs. She
brings sectoral experience from a
range of regulated sectors including
medicine, bioethics, financial
services and the media. She is Chair
Designate of the National Institute of
Health and Care Excellence (‘NICE’)
the organisation that assesses
clinical and cost effectiveness of
drugs, medical devices and
interventions in health and social
care. Her previous executive roles
include Chief Executive of the
Association of Medical Research
Charities and Chief Operating Officer
at BBC Future Media & Technology,
where she managed the business
functions of bbc.co.uk, including the
launch of iPlayer. Previous
non-executive roles include
Chairman of the Human Tissue
Authority, Deputy Chairman of the
Human Fertilisation and Embryology
Authority and Non-Executive of the
Pension Protection Fund. In 2014,
Sharmila was awarded an OBE for
services to medical research.
Sharmila has recent and relevant
financial experience as a member
of the Institute of Chartered
Accountants in England and Wales.
Other roles:
– Chair Designate of the
National Institute of Health
and Care Excellence
– Non-Executive Director of
National Savings & Investments
– Trustee Director of
Lifesight Limited
– Governor of the Health
Foundation
Angela brings a wealth of strategic,
technical and commercial experience
to the Board. Angela is Head of
Downstream Technology and Group
Chief Scientist at BP Plc. She is a
member of the Downstream
Executive Leadership Team. Angela
is responsible for enabling delivery
of the Downstream strategic agenda
through the development of
differentiated technology advantage
across the refining, fuels, lubricants
and petrochemicals businesses.
Since joining BP in 1982, she has held
many senior leadership roles around
the world in business development,
commercial and technology, including
in 2012, as Vice President and Head of
the Chief Executive’s Office. In 2010,
Angela was the winner of the UK
First Women’s Award in Science and
Technology recognising pioneering
UK women in business and industry.
Her track record and experience in
strategy, operations, technology
and transformational change are
a complementary addition to the
Board’s skill set. In June 2017,
Angela was recognised in the Queen’s
Birthday Honours List with the title
Dame Commander of the Most
Excellent Order of the British Empire
(‘DBE’) for services to the oil and
gas industry and encouraging
women into STEM careers.
Other roles:
– Non-Executive Director
of Rolls Royce Holdings Plc
– Non-Executive Director of SSE Plc
– Member of the Royal Society’s
Science, Industry and Translation
Committee
– Member of the Royal Academy of
Engineering Research Committee
73
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information
EXECUTIVE COMMITTEE
EXECUTIVE
COMMITTEE
Olivia Garfield
BA (Hons)
James Bowling
BA (Hons) Econ, ACA
Shane Anderson
BA (Hons) Econ
Dr. Tony Ballance
BSc (Hons), MA (Econ),
PhD
Sarah Bentley
BSc (Hons)
Chief Executive
Chief Financial Officer
Appointed as Director of
Strategy and Regulation
on 1 April 2020
Director of Strategy and
Regulation, who left the
Company on 31 March 2020
Chief Customer Officer
Dr. James Jesic
BEng (Hons), PhD,
MIChemE, CEng
Managing Director
of Production
C
D
E
D
E
T
D
E
D
E
E
E
Please see full biography
on page 72.
Please see full biography
on page 72.
Skills, competences
and experience:
Skills, competences
and experience:
Skills, competences
and experience:
Skills, competences
and experience:
Shane was appointed Director
of Strategy and Regulation in
April 2020 having held the
position of Head of Economic
Regulation within Severn
Trent since July 2015. Shane
is an experienced regulatory
economist, having spent the
majority of his career dealing
with regulatory issues for
both regulated companies
and regulators across the UK
and Australia. He led on the
development of the PR19
Business Plan, which led to
Severn Trent being one of only
three companies to receive
Fast Track status.
Tony’s extensive experience
in utility policy, regulation
and stakeholder engagement
meant he was ideally placed
to lead the Company’s
strategic, regulatory and
external affairs work. Prior
to joining Severn Trent,
he held the posts of Chief
Economist for Ofwat, Director
of London Economics and
Director of Stone and
Webster Consultants.
Other roles:
– Member of Water UK
Council
– Senior Independent
Director of the National
Forest Company
– Chairman of the Corporate
Advisory Panel of the
Regulatory Policy Institute
Sarah is responsible for
Customer Retail and Network
operations, Group Technology
and Transformation. She
previously worked for
Accenture as Managing
Director of their £3 billion
global digital business
focused on digital marketing,
mobility and analytics for
customers, employees and
the enterprise. Prior to
Accenture, Sarah was CEO
of Datapoint, an Alchemy
backed company delivering
CRM services, and Senior
Vice President of eLoyalty,
a global CRM and marketing
consultancy. She was SVP
of the European Business,
led the sales and operations
activity in North America and
ran eLoyalty Ventures L.L.C.
working in Silicon Valley,
Austin and New York.
Other roles:
– Non-Executive Director of
Lloyds Bank plc and Bank
of Scotland plc
– Director and Secretary
of Twizzletwig Limited
James brings a wealth of
operational, strategic and
environmental expertise to
the Executive Committee.
He has over 16 years’
regulated business
experience, gained in a
number of senior leadership
roles spanning the water
sector. Throughout his
career, James has delivered
industry-leading customer
service, environmental
performance and operational
transformation. In 2017,
James was appointed as
Managing Director of
Production at Severn Trent,
with responsibility for the
operation of the Group’s
multi-billion pound asset
base and the production
and supply of drinking water
to Severn Trent’s 4.5 million
customers. James is
a chartered engineer,
with a PhD in Chemical
Engineering. He also
attended Harvard
Business School.
74
Severn Trent Plc Annual Report and Accounts 2020
A
C
Audit Committee
Corporate Sustainability
Committee
N
Nominations Committee
R
T
D
E
Remuneration Committee
Treasury Committee
Disclosure Committee
Executive Committee
Denotes Committee Chair
Martin Kane
BSc, CEng, CEnv, MICE,
MIWEM, FIW
Special Adviser
Bronagh Kennedy
BA (Hons)
Helen Miles
CIMA
Neil Morrison
BSc (Hons), FCIPD
Andy Smith
BTech (Hons)
Group General Counsel
and Company Secretary
Capital Delivery and
Commercial Director
Director of
Human Resources
Managing Director,
Business Services
Dr. Bob Stear
MEng (Hons), PhD,
MCIWEM, CWEM, FIWater
Chief Engineer
E
D
E
E
E
E
E
Skills, competences
and experience:
Skills, competences
and experience:
Skills, competences
and experience:
Skills, competences
and experience:
Skills, competences
and experience:
Skills, competences
and experience:
Martin joined Severn Trent
Water in 1975 holding various
senior roles, giving him an
extensive and unique
understanding of the design,
construction and operation of
water and waste water
treatment plants, water
distribution networks and
sewerage systems. Martin
was Director of Customer
Relations for Severn Trent
Water from May 2006 until
January 2012, Chief Executive
Officer of Severn Trent
Services and Chief Engineer
until November 2018. Martin
remains on the Executive
Committee advising on many
key projects for the business.
Other roles:
– Chairman of the
Guarantors of
International Society for
Trenchless Technology
Bronagh joined Severn Trent
in 2011 as Group General
Counsel and Company
Secretary. She is also
responsible for compliance
and assurance and the
Group’s Corporate
Sustainability programme.
During her career she has
worked across several
sectors including finance,
leisure and hospitality and
she has a broad range of
corporate experience, having
led FTSE100 company HR,
communications, insurance,
risk and health, safety and
wellbeing functions. She has
also been a Non-Executive
Director on industry bodies
such as the British Hospitality
Association. Prior to moving
in-house she was a senior
associate solicitor in Allen &
Overy’s banking and
insolvency group.
– Chairman of the Coventry
Other roles:
and Warwickshire
Growth Hub
– Non-Executive
Director and
Chairman of the HR
and Remuneration
Committee of
British Canoeing
– Member of the
GC100 Group
Helen joined Severn Trent in
November 2014 as the Chief
Commercial Officer. Helen
brings with her a breadth
of commercial experience
having worked within
regulated businesses and
sectors across telecoms,
leisure and banking. As a
member of the UK Board,
Helen was instrumental
in delivering HomeServe’s
future growth strategy
and ensuring a sustainable,
customer-focused business.
As an experienced finance
professional, Helen was
previously Chief Financial
Officer for Openreach, part
of BT Group Plc, and has
extensive experience of
delivering major business
transformation across the
Group. Prior to BT Group,
Helen worked in a variety of
sectors and organisations
such as Bass Taverns,
Barclays Bank, Compass
Group and HSBC.
Other roles:
– Non-Executive Director
of the Royal Navy
Neil joined Severn Trent in
August 2017 as Director of
Human Resources. Neil
started a career in HR
management in 1996 and for
the subsequent 12 years he
worked in a variety of HR roles
within FTSE100 companies,
including Rentokil Initial and
GUS (which latterly became
Home Retail Group). Before
joining Severn Trent, Neil
worked at Penguin Random
House taking responsibility
for strategic people issues
across their publishing and
distribution offices in the UK,
APAC, India and South Africa.
He was one of the main leads
in helping to steer and finalise
the global merger between
Random House and Penguin.
Andy was appointed to the
role of MD, Business Services
on its creation in 2014 having
previously been responsible
for the water business within
Severn Trent Water. Andy
brings to the role a broad
range of executive and
operational expertise
gained from diverse sectors.
He has worked in the UK
and overseas with global
businesses such as BP,
Mars and Pepsi in both
engineering, HR and
operational management
roles. Previously, he has
served as a member of the
Board at Severn Trent Plc
and at Boots Group Plc.
Other roles:
– Non-Executive Director
of Diploma Plc
– Director of Water Plus
Limited – joint venture with
United Utilities
Bob was appointed
Chief Engineer in November
2018 and is a chartered
environmental engineer who
joined Severn Trent in 1997 as
a process technician. He has
worked his way up through
the Company via operational,
engineering, strategic and
innovation roles. In particular
Bob played a key role in
the transformation of the
waste water business and
successfully governed a
c.£1.2bn capital programme.
In 2013, Bob worked alongside
the Government on the
implementation of the 2014
Water Act. He has a PhD in
waste water treatment and is
Severn Trent’s representative
on the UK Water Industry
Research Board.
Other roles:
– Director of the World
Water Innovation Fund
75
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information
GOVERNANCE FRAMEWORK
Governance Framework
We pride ourselves on having a high-functioning, well-composed,
independent and diverse Board and being transparent in all that we
do. Maintaining the highest standards of governance is integral to
the successful delivery of our strategy. Our governance framework
ensures that the Board is effective in both making decisions and
maintaining oversight, whilst also adhering to our well-established
culture of Doing the Right Thing.
Documents available at:
www.severntrent.com
– Articles of Association
– Matters Reserved to the Board
– Charter of Expectations
– Committee Terms of Reference
The Board’s role is to ensure the long-term sustainable success of Severn Trent by setting our strategy through which value can be
created and preserved for the mutual benefit of our shareholders, customers, employees and the communities we serve. The Board
provides rigorous challenge to management and ensures the Group maintains an effective risk management and internal control system.
THE BOARD
p72-73 Biographies
p79-80 Board Activities
p81 Roles and Responsibilities
Informing
Reporting
THE BOARD DELEGATES CERTAIN MATTERS TO ITS PRINCIPAL COMMITTEES – WHICH REPORT TO THE BOARD AT EVERY MEETING
Nominations
Committee
Assists the Board
by keeping the
composition of
appointments to the
Board under review.
The Committee also
assists the Board on
issues of Executive
Director succession
planning, conflicts
of interest and
independence.
Corporate
Sustainability
Committee
Provides guidance
and direction to
the Company’s
Sustainability Strategy
based on our Code of
Conduct ‘Doing the
Right Thing’. The
Committee also
reviews the Group’s
non-financial risks
and opportunities.
Remuneration
Committee
Treasury
Committee
Audit
Committee
Determines the
Company’s policy
on the remuneration
of Executive Directors,
other members of
the Executive
Committee and the
Chair of the Board.
The Committee also
reviews workforce
policies and practices.
Provides oversight of
treasury activities in
implementing the
policies and the
funding and treasury
risk management plan
approved by the Board.
The Committee also
reviews and approves
the Group Treasury
Policy Statements.
Assists the Board
in discharging its
responsibilities for
the integrity of the
Company’s financial
statements, risk
management,
assessment of the
effectiveness of the
system of internal
control and the
effectiveness of
Internal and
External Auditors.
p87 Report
p99 Report
p102 Report
p97 Report
p91 Report
Informing
Reporting
THE CHIEF EXECUTIVE AND THE SEVERN TRENT EXECUTIVE COMMITTEE (‘STEC’)
Responsibility for the development and implementation of the Group’s strategy and overall commercial objectives rests with the
Chief Executive who is supported by STEC.
Informing
Reporting
An Executive Committee 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.
DISCLOSURE COMMITTEE
76
Severn Trent Plc Annual Report and Accounts 2020 Structure of the
Governance section
We have restructured and
simplified the Governance
section in our report this year
to follow the structure of the
2018 UK Corporate Governance
Code (the ‘2018 Code’), to
demonstrate how we have
met the new requirements
and aid navigation of the report.
We welcome feedback on this
new approach.
The 2018 UK Corporate
Governance Code is available
at www.frc.org.uk
T
N
E
M
E
T
A
T
S
E
T
A
R
O
P
R
O
C
E
C
N
A
N
R
E
V
O
G
BOARD LEADERSHIP
AND COMPANY PURPOSE
An effective Board
The Board’s role is to be effective in securing the long-term success
of Severn Trent by ensuring the delivery of our strategy. Maintaining
the highest standards of governance is integral to this, together
with ensuring that the Board takes decisions that create sustainable
long-term value for the mutual benefit of our shareholders,
customers, employees and the communities we serve.
The operation of our Board is supported by the collective experience
of the Directors and the diverse skills and experience they possess.
This enables the Board to reach decisions in a focused and balanced
way, supported by independent thought and constructive debate
between the Directors. Trust and mutual respect are the cornerstones
of relationships between our Directors, with a Board dynamic that
supports open and honest conversations to ensure decisions are
taken for the benefit of Severn Trent in full consideration of the
impact upon all stakeholders.
The requirements of the Board are clearly documented in the Severn
Trent Plc Articles of Association, Charter of Expectations and Schedule
of Matters Reserved to the Board. The Board reviewed and approved
the Schedule of Matters Reserved to the Board in March 2020. All of
these documents are available on the Severn Trent Plc website.
As outlined on page 81, there is a clear division of responsibilities
between the roles of Chair and CEO. To allow these responsibilities to
be discharged effectively, the Chair and CEO maintain regular dialogue
outside the Boardroom, to ensure an effective flow of information.
The Non-Executive Directors have direct access to senior management
at all times. Informal as well as formal contact with the wider business
is encouraged to develop a deeper understanding of Severn Trent’s
operations and requests for further information are welcomed. This
broadens the Non-Executive Directors’ sources of information and
enables them to consider the wider impact of any Board decisions on
stakeholders more broadly.
The effectiveness of the Board is reviewed at least annually and
conducted according to the guidance set out in the 2018 Code and
FRC Guidance on Board Effectiveness. You can read more about
this year’s process on page 83.
Strategy
Responsibility to all of our stakeholders for the approval and
delivery of the Group’s strategy and for creating and overseeing
the framework to support its delivery sits with the Board. The
Board also holds a dedicated strategy meeting with the Executive
Committee to help consider the strategic direction of the Company
for the short, medium and long term.
Responsibility for the development and implementation of the
Group’s strategy and overall commercial objectives rests with
the Chief Executive who is supported by the Executive Committee.
The Directors present their report and the audited Group financial
statements, for the year ended 31 March 2020. 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 2020.
Stakeholder engagement
Stakeholder engagement is central to our strategy. We are focused
on driving long-term sustainable performance for the benefit of our
customers, shareholders and wider stakeholders. The Board’s role is
not to balance the interests of the Company and those of stakeholders;
its role is to consider all the relevant factors and select the course of
action that best leads to the success of Severn Trent in the long term.
Our dedicated stakeholder engagement and s.172 statements on pages
28 and 29 respectively set out how the Board is supported in doing
exactly that.
Shareholder engagement
Investor meetings
Investor meetings are predominantly attended by our CEO, CFO and
Head of Investor Relations, although other Executive Committee
members also attend. During the financial year ended 31 March 2020,
we held over 152 investor meetings and met with over 277 existing and
potential investors. These meetings were attended by 61 shareholders,
representing c.62% of our register.
The meetings focused on the Group’s AMP7 strategy, Board succession,
environmental leadership and climate change adaptation. The Chair
and individual Directors regularly engage with major shareholders
to understand their views on governance and performance against
strategy. Committee Chairs also engage with shareholders on
significant matters related to their area of responsibility.
Investor presentations and tours
On 4 March 2020, we hosted our Capital Markets Day where we
invited our investors, analysts and key stakeholders to attend the
event. We presented our new Purpose and Values, our Sustainability
Framework, which covered our Triple Carbon Pledge, biodiversity
and nature approach, our water management plans, the new
interconnector (transferring water from the North to the South), how
we are engaging our communities and colleagues and our approach
to social purpose and governance to help deliver on our promises.
Annual General Meeting (‘AGM’)
Our 2019 AGM was held on 17 July 2019 at which 74.91% of our
shareholders (voting capital) voted. We were delighted to receive
in excess of 98% votes in favour for all of our resolutions, including
over 99% approval to extend our long-term incentive plans and
Remuneration report. All Directors made themselves available
to answer questions from shareholders.
Annual Report
Our Annual Report is available to all shareholders and we aim to
make our Annual Report as accessible as possible. Shareholders
can opt to receive a hard copy in the post, a PDF copy via email
or download a copy from our website. Please contact the Company
Secretary to request a copy.
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Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information
CORPORATE GOVERNANCE STATEMENT
CONTINUED
CODE
COMPLIANCE
During the year ended 31 March 2020, we have been compliant
with the provisions and principles of good governance contained
in the 2018 UK Corporate Governance Code (the ‘2018 Code’).
The Board welcomed the move to simplify the Code, and the
greater clarity it brings to how businesses should transparently
report to their shareholders.
We believe good corporate governance is about how we provide
confidence in the delivery of our performance to our stakeholders
and is essential for the long-term sustainable success of our business.
This table shows where shareholders can evaluate how the
Company has applied the principles of the 2018 Code and where
key content can be found in this report.
PRINCIPLES OF THE 2018 CODE
Board Leadership and Company Purpose
The role of the Board
Chair’s Introduction to Governance
Board Engagement with Stakeholders
Section 172 Statement
Establish Purpose and Values
Oversight of Strategy
Policies and Practices
Assessing risks and viability
PAGE
77
69
77
28 – 29
70
77
104
57
Measurement of strategy (ODIs and KPIs)
32 – 33
Division of Responsibilities
Board Independence
Board Committees
Board Attendance
Composition, Succession and Evaluation
Board Biographies
Board Composition and Tenure
Board Evaluation
Board Succession Planning
Nominations Committee report
Audit, Risk and Internal Controls
Audit Committee report
Our Approach to Risk
Principal Risks
Emerging Risks
Remuneration
Remuneration Committee report
78
82
76
73
72 – 73
82
83
90
87
91
57
58
63
102
Corporate website
We have recently updated our website, severntrent.com,
to make it more user-friendly for our stakeholders. This has a
dedicated investor section which includes an overview of Severn
Trent Plc and our history, our Company information and results,
our Annual Reports, results presentations (including webcasts)
and an investor news section including information which
may be of interest to our shareholders.
CAPITAL MARKETS DAY
On 4 March 2020, we held our sustainability-led Capital Markets
Day. The objective of the day was to share our Environmental,
Social and Governance (‘ESG’) ambitions with stakeholders and
demonstrate how our ambitions on the environment and society
make good business sense and deliver benefits for investors.
We did this through covering five key areas:
– Our Triple Carbon Pledge – demonstrating our plans to
reduce demand and increase renewable supplies to meet
our carbon commitments.
– Restoring the natural habitat – how we’re embracing natural
solutions, and using data and customer behaviour to enhance
our catchments.
– Managing water scarcity – the role we play in the national
water resource market and what we’re doing on our own
network and in customers’ homes.
– Helping people to thrive – what we do to support customers,
colleagues and communities, to make a real impact on
people’s lives.
– Being a company you can trust – outlining our approach
to governance and our new Purpose and Values.
We were joined by 76 external attendees, higher than our prior
year attendance. There was representation from a range of
investors and analysts, ESG-specific organisations, UK
Government, Business in the Community and Will Hutton
from the Purposeful Company.
For those unable to attend, we issued a detailed announcement
to the market on the morning of the event, and published content
on our new corporate website dedicated to the day, which included
all of the materials and videos of each session.
Severn Trent Plc Annual Report and Accounts 2020 KEY ACTIVITIES OF
THE BOARD IN 2019/20
Key Stakeholder Groups
Customers
Communities
Shareholders and Investors
Workforce
Suppliers and Contractors
Regulators and Government
PERFORMANCE
CEO Review
The key activities considered by the Board during the year
are set out below.
The Board recognises the value of maintaining close relationships
with its stakeholders, understanding their views and the importance of
these relationships in delivering our strategy and the Group’s purpose.
The Group’s key stakeholders and their differing perspectives are
taken into account as part of the Board’s discussions. You can read
more in our s.172 statement on pages 28 to 29.
Board meetings follow a carefully tailored agenda that is agreed in
advance by the Chair, in conjunction with the CEO and Company
Secretary. Each meeting starts with an update from the Chairs of our
Board Committees on the proceedings of those meetings, including
the key discussion points and any particular areas of concern. A typical
Board meeting will comprise reports on operational and financial
performance, legal and governance updates and one or two detailed
deep dives into areas of particular strategic importance. Details of the
Directors’ attendance at the scheduled meetings that took place during
the year can be found on page 73.
Operational Performance Reviews
Commercial and Capital Delivery Reports
The CEO led discussions focusing on general
business performance, key strategic initiatives
under way, environmental matters such as
biodiversity, environmental leadership and
climate change and health and safety.
Received separate reports for the Regulated
Business and Business Services, detailing
performance against key targets and ODIs,
environmental matters and health and safety.
Reviewed progress on delivering against our ODI
targets for major capital programmes and health
and safety.
FINANCIAL
CFO Review
Group Budget
Dividend and AMP7 Dividend Policy
The CFO led discussions focusing on financial
performance across the Group.
Considered performance vs the 2019/20 Group
Budget and agreed the 2020/21 Group Budget.
Discussions included:
– Group Financing Updates – overseen
by the Treasury Committee; and
– Tax Updates – including the approval
of the Group’s Tax Strategy. Read more
about our Fair Tax Mark on page 39.
Reviewed dividend cover and shareholder returns,
taking into consideration financial performance,
liquidity, credit metrics and Ofwat’s Back in Balance
dividend guidance and agreed the Severn Trent Plc
Dividend Policy for AMP7.
Results and Regulatory Reporting
Viability Statement Updates
Pension Scheme Updates
On the recommendation of the Audit Committee,
reviewed and approved the half and full year
results announcements, presentations to analysts,
Annual Report and Accounts, Notice of Meeting
and Annual Performance Report.
ENVIRONMENTAL
Agreed the viability statement period to be
reported in the Annual Report and Accounts.
Received updates on the Group’s pension
schemes and triennial actuarial valuation.
Read more on page 66.
Climate Change Adaptation
Strategy for Environmental Leadership
Biodiversity
Received an update on climate change projections
and considered climate risks applicable to Severn
Trent. Reviewed the approach for the Company’s
Climate Change Adaptation report, including PR24
considerations and stakeholder engagement.
RISK MANAGEMENT
Enterprise Risk Management
Considered the Group’s Environmental Strategy
and committed to steps in respect of biodiversity,
water treatment wetlands, tree planting and
catchment management.
Received regular updates on the Company’s target
to improve at least 75 hectares of SSSIs and other
designated sites by the end of AMP6. Read more
on page 30.
Review of Effectiveness of Risk
Management and Internal Controls
Deep Dives on Risks
Conducted half-yearly reviews of the Group’s
ERM Risk Register, covering core internal and
external risks, risks driven by business change
and emerging risks. Read more on page 63.
A separate Board risk workshop was also
held during the year.
Reviewed the risk management and internal
controls in place across the Group and
determined their effectiveness.
Read more on page 93.
Cyber Risk – Assessed the progress made to
maintain and improve cyber security systems.
Reservoir Risk – Scrutinised the processes, internal
controls and resources in place to manage reservoir
risk, extend asset life and guarantee serviceability.
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Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information
CORPORATE GOVERNANCE STATEMENT
CONTINUED
STRATEGIC DEEP DIVES
At each meeting, the Board receives one or two detailed deep dives into areas of particular strategic importance to evaluate progress, provide
insight and, where necessary, decide on appropriate action. Some examples are provided below.
AMP7 Preparedness
Bioresources Advanced Digestion Investment
Birmingham Resilience Programme Update
Received an update on the detailed AMP7 delivery
plan and considered the learnings of the PR19 Draft
and Final Determinations.
Considered and approved investment in advanced
anaerobic digestion through thermal hydrolysis
and biomethane enhancement.
Received regular updates on the Birmingham
Resilience and Elan Valley Aqueduct programmes.
Members of the Board also visited the site during
the year.
C-MeX
Becoming a Purposeful Company
World Water Innovation Fund Update
Received a detailed update on the refreshed
C-MeX approach to improve customer outcomes.
Discussed and approved a request to Ofwat for the
adoption of a new Social Purpose licence condition
in Severn Trent Water’s Licence to demonstrate
our commitment to being a Purposeful Company.
Received an update on the work of the Fund in sharing
best practice and conducting innovation trials to enable
more rapid technology adoption across the sector.
Brexit
Board Strategy Day
COVID-19
Discussed preparations, scenario planning
and impact assessments along with the options
for mitigating potential risks.
We held a dedicated Board Strategy Day in June 2019
to consider AMP7 delivery, sector legitimacy and the
Group’s carbon and energy strategy.
Received at least weekly updates on the Company’s
preparations, scenario planning and impact
assessments along with actions being taken
across the Group.
Further detail can be found on pages 10 to 11.
GOVERNANCE, LEGAL AND REGULATORY
Governance, Regulatory and Legal Updates
Board Succession Planning and Diversity
Board Effectiveness Evaluation
Monitored regulatory and legislative developments,
including renationalisation, and considered any
potential impact on the Group’s operations.
On the recommendation of the Nominations
Committee, considered the arrangements
for Board Succession Planning and approved:
Received regular litigation reports from the Group’s
legal team.
– The appointment of Christine Hodgson as
Chair Designate; and
Approved arrangements for delegated financial
authority across the Group.
– The appointment of Sharmila Nebhrajani
as Non-Executive Director.
Reviewed progress against the Action Plan for 2019/20
and set the Action Plan for 2020/21. Conducted an
internally facilitated Board evaluation covering the
Board’s effectiveness, processes and ways of working.
Read more on page 83.
Read more on page 90.
Considered and agreed to proposed Licence
modifications.
On the recommendation of the Corporate
Sustainability Committee, approved the
Modern Slavery Statement.
WORKFORCE, CULTURE AND VALUES
Our Culture
Reviewed the results of the annual QUEST survey and identified areas for improvement and appropriate courses of action. On the recommendation of the Remuneration
Committee, satisfied itself that workforce policies and practices are consistent with Company’s values and culture. Received updates from Non-Executive Directors
following attendance at the Company Forum. Discussed gender pay, the development of women into senior roles and driving greater diversity and inclusion in terms
of gender, ethnicity and social background.
Talent Development and Succession Planning
Severn Trent Academy
Company Purpose and Values
Received an update on the evolution and
development of talent acquisition and
succession planning.
Monitored progress towards developing our
Academy to enable us to be technically brilliant
where it matters most.
Reviewed our new Company Purpose and Values,
including inputs from the workforce and Company
Forum in its development.
OPERATIONAL AND SITE VISITS
The Board, and individual Directors, undertook 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. Christine Hodgson undertook 12 site visits as part of her induction. Further detail
can be found on page 85.
Wonderful Water Tour
Our Board immersed themselves in our Wonderful
Water Tour, an innovative educational roadshow
available to every primary school in the Midlands.
Hafren Dyfrdwy
Members of the Board visited Llwyn Onn Water Treatment
Works to observe water treatment processes first-hand
and met the teams involved.
Agrivert
The Board received an overview and demonstration
of the anaerobic digestion process and operations,
including implementation of technological advances.
Members of the Board met teams across the site and
observed a practical demonstration of health and
safety considerations on complex operational sites.
Birmingham Resilience Programme
Members of the Board visited the site of our largest
capital project to observe progress first-hand and
met the teams involved.
80
Severn Trent Plc Annual Report and Accounts 2020
DIVISION OF
RESPONSIBILITIES
There is clear division between Executive and Non-Executive responsibilities which ensure accountability and oversight. The roles of Chair
and Chief Executive are separately held and their responsibilities are well defined, set out in writing and regularly reviewed by the Board.
Director
Responsibility
Chair
Andrew Duff – retired from
the Board 31 March 2020.
Christine Hodgson – appointed
as Independent Non-Executive
Director on 1 January 2020
and as Chair on 1 April 2020.
– Leads our unified Board and is responsible for its effectiveness.
– Sets agendas and ensures timely dissemination of information to the Board, to support sound decision
making and allow for constructive discussion, challenge and debate, in consultation with the CEO, CFO
and Company Secretary.
– Responsible for scrutinising the performance of the Executive Committee and overseeing the annual
Board Effectiveness evaluation process.
– Facilitates contribution from all Directors and ensures that effective relationships exist between them.
– Ensures that the views of all stakeholders are understood and considered appropriately in Board
discussion and decision making.
Senior Independent
Non-Executive Director
Kevin Beeston
In addition to his responsibilities as a Non-Executive Director, Kevin also:
– Supports the Chair in the delivery of their objectives.
– Acts as an alternative contact for shareholders should they have a concern that is unresolved by the Chair,
CEO or CFO.
– Leads the appraisal of the Chair’s performance with the Non-Executive Directors.
– Undertakes a key role in succession planning for the Board, together with the Board Committees,
Chair and Non-Executive Directors.
Independent Non-Executive
Directors
John Coghlan
Sharmila Nebhrajani
Dominique Reiniche
Philip Remnant
Angela Strank
– Monitor the delivery of strategy by the Executive Committee within the risk and control framework set by
the Board.
– Satisfy themselves that internal controls are robust and that the External Audit is undertaken properly.
– Engage with internal and external stakeholders and feed back insights to the Board, including in relation
to employees and the culture of the Company.
– Constructively challenge and assist in the development of strategy.
– Have a key role in succession planning for the Board, together with the Board Committees, Chair and SID.
– Serve on various Committees of the Board.
Chief Executive
Liv Garfield
– Represents Severn Trent externally to all stakeholders, including our employees, the Government
and regulators, customers, suppliers and the communities we serve.
– Develops and implements the Group’s strategy, as approved by the Board.
– Sets the cultural tone of the organisation.
– Facilitates a strong link between the business and the Board to support effective communication.
– Responsible for overall delivery of commercial objectives of the Group.
– Promotes and conducts Group affairs with the highest standards of integrity, probity and corporate
governance, in line with our strategic framework and values. The CEO’s review can be found on page 12.
Chief Financial Officer
James Bowling
– Manages the Group’s financial affairs. The CFO’s review can be found on page 51.
– Supports the CEO in the implementation and achievement of the Group’s strategic objectives.
– Oversees Severn Trent’s relationships with the investment community.
– Represents Severn Trent externally to all stakeholders, including our employees, the Government and
regulators, customers, Pension Trustees for the Company’s defined benefit pension schemes, lenders,
suppliers and the communities we serve.
Company Secretary
Bronagh Kennedy
– Ensures sound information flows to the Board in order for the Board to function effectively and efficiently.
– Advises and keeps the Board updated on Listing and Transparency Rule requirements and on best practice
corporate governance developments.
– Facilitates a comprehensive induction for newly appointed Directors, tailored to their individual
requirements.
– Ensures compliance with Board procedures and provides support to the Chair.
– Co-ordinates the performance evaluation of the Board in conjunction with the Chair.
– Provides advice and services to the Board.
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CORPORATE GOVERNANCE STATEMENT
CONTINUED
The Board and the Nominations Committee have fully considered
Board succession during the course of the year to ensure that the
Board has the right mix of skills and experience, as well as the
capability to provide constructive challenge and promote diversity.
Additional detail can be found within the Nominations Committee
report on page 87.
Board training and development
The environment in which we operate is continually changing. It is
therefore important for our Executive and Non-Executive Directors
to remain aware of recent, and upcoming, developments and keep
their knowledge and skills up to date. Our Board Effectiveness
process includes training discussions with the Company Secretary
and, as required, we invite professional advisers and subject matter
experts to provide in-depth updates. These updates are not solely
reserved for legislative developments but aim to cover a range of
strategic issues including, but not limited to, the economic and political
environment, environmental, technological and social considerations.
Our Company Secretary also provides regular updates to the Board
and its Committees on regulatory and corporate governance matters.
The Board activities schedule on pages 79 to 80 sets out further detail
on the topics covered during the year.
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.
Informal Board interactions
The Board also meets more informally, in the form of Board dinners,
outside of the scheduled Board meeting calendar. These sessions
are important in building and maintaining successful relationships
and promoting a culture of openness in Board discussions. Senior
management and external stakeholders are often invited to attend
these sessions.
Directors’ resources
Directors also have access to our online resource library, 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.
Directors’ skills and experiences
An effective Board requires the right mix of skills and experience.
Our Board is a diverse and effective team focused on promoting the
long-term success of the Group.
The matrix opposite details some of the key skills and experience
that our Board has identified as particularly valuable to the effective
oversight of the Company and execution of our strategy.
Board independence
The independence of our Non-Executive Directors is formally
reviewed annually by the Nominations Committee, and as part
of the Board evaluation exercise. Particular focus is applied to the
Directors who have served six years on the Board. 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 2018 Code, all
the Directors, with the exception of Andrew Duff who retired from
the Board on 31 March 2020, will retire at this year’s AGM and submit
themselves for appointment or re-appointment by shareholders. Each
of the Non-Executive Directors seeking appointment or re-appointment
are considered to be independent in judgment and character.
Conflicts of interest
Severn Trent Plc has a Conflicts of Interest Policy in place for all Group
companies. Our Board and its Committees consider potential conflicts
at the outset of every meeting and the Board formally reviews the
authorisation of any potential conflicts of interest every six months with
any conflicts being recorded in the Conflicts of Interest Register. 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 and the practical steps that are to be taken
to avoid conflict situations. When reviewing conflict authorisations, the
Board considers any other appointments held by the Director as well
as the findings of the Board Effectiveness evaluation.
The Policy continues to be applied practically throughout the year,
such as considering the potential conflict presented by Directors
having roles on other Group companies. Modifications were made to
the Severn Trent Audit Committee meeting structure during the year
to facilitate dedicated Committee focus for Hafren Dyfrdwy regulatory
matters and remove a potential conflict of interest in relation to Directors
of both Severn Trent Water Limited and Hafren Dyfrdwy Cyfyngedig.
COMPOSITION, SUCCESSION
AND EVALUATION
Board composition
As at the date of this report, our Board comprised the new Chair
(who was independent on appointment), six independent Non-Executive
Directors and two Executive Directors. The details of their career
background, relevant skills, Committee membership, tenure and
external appointments can be found within their individual biographies
on pages 72 to 73. Further detail on the role of the Chair and members
of the Board can be found on page 81.
The Chair, Senior Independent Director and Non-Executive Directors
are appointed for a three-year term, subject to annual re-election
by shareholders following consideration of the annual Board
Effectiveness evaluation outputs. 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 composition and effectiveness of the Board is subject to regular
review by the Nominations Committee which, in particular, considers
the balance of skills, experience and independence of the Board, in
accordance with the Board Diversity Policy, the statement for which
is available on the Severn Trent Plc website. Any new appointments to
the Board result from a formal, rigorous and transparent procedure,
responsibility for which is delegated to the Nominations Committee
(although decisions on appointments are a matter reserved for the
Board). Further information on the work of the Nominations
Committee can be found on page 87.
82
Severn Trent Plc Annual Report and Accounts 2020 Olivia
Garfield
James
Bowling
Christine
Hodgson
Kevin
Beeston
Philip
Remnant
John
Coghlan
Dominique
Reiniche
Angela
Strank
Sharmila
Nebhrajani
Board skills and experience
Topics
Strategy
M&A
Corporate finance/treasury
Accounting
Regulation
Technology/innovation
Customer
Brands
Engineering
Utility sector
Environmental science, including
climate change
People management
Commercial procurement
Construction/infrastructure delivery
Large capital programmes
Political affairs
Board evaluation
Our annual Board evaluation provides the Board and its Committees with an opportunity to consider and reflect on the quality and
effectiveness of its decision making, the range and level of discussion and for each member to consider their own contribution and
performance. This year, the review was facilitated internally by the Company Secretary, who is well placed as an independent sounding
board to the process. The approach we took was to explore some of the themes from last year’s action plan and design an interview
matrix to understand where improvements had been made and where further focus is needed. The matrix was discussed in comprehensive
one-to-one meetings with the Company Secretary, with additional input from the Chair, Senior Independent Director and Committee Chairs.
These meetings took place during February 2020. The key themes were shared with the Board and its Committees along with a 2020 action
plan. An externally facilitated evaluation was last conducted by Manchester Square Partners in 2017/18. The 2020/21 process will be externally
facilitated, and potential providers are currently being considered.
Step 1
2019/20
Process Planning
Step 2
One-to-One
Meetings
Step 3
Evaluation
and Reporting
The Company Secretary undertook
a detailed review of the Board
Effectiveness evaluation process
in 2018/19 and restructured our
interview matrix to cover matters
highlighted in the prior year review
and recommendations of the 2018
Code, Parker Review and FRC
Guidance on Board Effectiveness.
Board and Committee members
participated in comprehensive
one-to-one meetings with
the Company Secretary, with
additional input from the Chair
and Senior Independent Director.
Separate discussions were held
to consider the effectiveness of
the CEO, led by the Chair. The
outgoing Chair’s performance
evaluation was led by the Senior
Independent Director. Discussions
to consider the effectiveness of
Board Committees were led by the
respective Committee Chairs.
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 Chair for consideration. The
Company Secretary and Chair
met to discuss the findings, with
the resulting report being tabled
to the Nominations Committee
and Board in March 2020.
Step 4
Agree Actions
and Monitor Progress
The findings of the evaluation
exercise were fully considered
when making recommendations
in respect of the re-appointment
of individual Directors and
included an assessment of their
independence, time commitment
and individual performance.
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CONTINUED
Evaluation findings
The evaluation concluded that excellent progress had been made in respect of areas for further focus identified in the 2018/19 review
as detailed below.
Evaluation Action 2018/19
Progress
Succession Planning
Opportunity to apply more focus to succession planning,
in full consideration of Director tenure and the Parker Review
recommendations on diversity.
Talent and Succession Planning is now a standing Nominations
Committee and Board agenda item.
Significant focus has been given to Board succession during the year
in full consideration of the Parker Review, with Christine Hodgson
and Sharmila Nebhrajani joining the Board.
A forward programme for Non-Executive Director recruitment,
including a skills matrix, has also been developed during the year.
Our Board skills matrix can be found on page 83.
Balance of Debate
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.
Board meetings have been restructured to allow additional time to
engage informally with presenters and discuss matters as a Board.
A broader pool of presenters now attend Board and Board Committee
meetings and attend informal Board dinners.
Remit of Board Committees
Opportunity to review the duties within the respective Committee Terms
of Reference and ensure that Committee meetings have sufficient time
allocated to them.
New ‘Discharge of Committee Duties’ reporting implemented during
2018/19. This provided an annual update to the Board Committees
on the work completed during the year in fulfilling their duties
and satisfying the remit of their Terms of Reference.
Board Committee meetings have also been restructured to ensure
sufficient time is allocated and to allow for informal interaction
with presenters.
The key theme highlighted in the 2019/20 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.
Board Forward Agenda
The Board noted the excellent chairing of Board discussions despite challenging agendas to consider the PR19 process and outputs.
Opportunity to allocate additional time on the Board agenda to consider fewer, more strategic, visionary and forward-looking topics with a focus
on the opportunities available through the deployment of technology and innovation.
The Board observed that significant time had been devoted to the performance review section of the agenda, which had enabled Non-Executive
Directors to gain a deep understanding of the operational challenges facing the business and really get to know the accountable Executive
Committee members. Now that this knowledge was well embedded, the time allocated to this section of the meeting could be reduced, with
regular updates being considered outside of the formal meeting environment with deep dives into specific topics as required.
Opportunity to spend even more time in the business through more Board meetings being held at operational sites.
Risk Management
Opportunity to make additional enhancements to the Group’s Enterprise Risk Management (‘ERM’) approach to risk. A dedicated ERM Board
workshop was held in March 2020, scheduled outside of the normal Board meeting calendar, to discuss and agree next steps. An update is
scheduled to be discussed by the Board in October 2020.
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. 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. No approvals were sought during the year for any significant external appointments. The full list of external appointments
held by our Directors can be found on pages 72 to 73. All of our Non-Executive Directors are considered to be independent.
84
Severn Trent Plc Annual Report and Accounts 2020 Induction programme
We develop a detailed, tailored induction for each new Non-Executive Director. This includes one-to-one meetings with the Chair and each
of the existing Non-Executive Directors. They have one-to-one meetings with the CEO, CFO and the Company Secretary along with other
members of the Executive Team. They also meet members of the operational teams and visit our key operational sites and capital projects
to ensure they get a first-hand understanding of the water and waste water businesses. New Directors receive a briefing on the key duties
of being a Director of a regulated water company and they also meet with Ofwat as part of the appointment process.
We continually enhance the Board’s induction process, building in feedback from new appointees and the Board Effectiveness evaluation.
For an in-depth look at Christine Hodgson’s induction, please see below.
Chair’s induction
Christine’s induction spanned 26 days. She visited 12 sites and met 230 of our employees to gain a thorough knowledge and understanding
of Severn Trent and our culture. A member of our Executive Team, Martin Kane (who has over 45 years’ experience at Severn Trent),
accompanied Christine on all of her induction meetings in order to answer any questions in the moment and reinforce her understanding
of our business. A summary of her key induction visits and events is set out below.
Meeting our people and stakeholders
November 2019 – January 2020
Individual meetings with Non-Executive Directors
November 2019 – January 2020
Individual meetings with Executive Committee members
6 December 2019
Deep dives into Internal Audit and risk management processes
16 December 2019
Briefing on the Remuneration Committee to gain an overview of how our Remuneration Policy ensures
a clear link between performance and pay for executives. Meeting with remuneration advisers, PwC
January-February 2020
Meetings with key stakeholders, including Ofwat, DWI, Defra, EA, CCW
4 February 2020
Deep dives into Treasury and Pensions
March 2020
Christine attended our Company Forum to understand first-hand the views of our workforce across the organisation
Operational site visits to understand our key business areas first-hand:
20 December 2019
Water Distribution – including site visit to Edgbaston Distribution Works
23 December 2019
Water Treatment – including site visit to Church Wilne Water Treatment Works
7 January 2020
Waste Water – including site visit to Spernal Sewage Treatment Works
9 January 2020
Sewerage Network – including site visit to Barnhurst Works
27 January 2020
Business Services – including site visits to Coleshill and Minworth
11 February 2020
Capital Projects – including Birmingham Resilience Programme (‘BRP’), Frankley and Elan Valley Aqueduct
(‘EVA’) schemes – see case study overleaf
“ My induction into Severn Trent has been very
comprehensive and professionally organised.
The highlight for me has been meeting,
and listening to the views of, our people
and experiencing the Severn Trent culture
first hand. Their passion and commitment
to serve all our stakeholders is palpable.”
Christine Hodgson
Chair
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CONTINUED
INDUCTION
DEEP DIVE
Birmingham Resilience Programme (‘BRP’)
BRP will secure a second source of water supply for Birmingham and safeguard one
of our oldest, but most strategic and efficient, water resources for years to come.
09.00
–
09.15
09.15
–
09.30
09.30
–
10.00
10.00
–
10.15
TEAM
INTRODUCTION
HISTORY OF
BIRMINGHAM WATER
WHAT WE ARE
DELIVERING FOR BRP
RAW WATER TEAM
INTRODUCTION
Introduction to the team delivering
the BRP scheme, the biggest water
enhancement project in the sector
in AMP6.
Christine met the team responsible
for delivering BRP, including:
Executive Committee member
Martin Kane provided an overview
of the 100 year old, 120 km long
Elan Valley Aqueduct, the primary
water supply to Birmingham, and
outlined how BRP would safeguard
this important asset.
• Programme Director;
• Head of Capital Delivery;
• Project Manager – Raw Water
Workstream; and
• Regional Director of the Supply
Chain Partner.
She heard the views and experiences
of the workforce delivering BRP
and received an update on progress
to date.
Our BRP Programme Director
provided an overview of the two
elements of the scheme as follows:
• New abstraction point on the
River Severn together with a raw
water pumping station and 20 km
pipeline; and
• New treatment stream at Frankley
Water Treatment Works capable
of treating raw river water.
She also provided Christine with an
overview of the benefits and success
factors for BRP and the use of innovative
techniques being deployed by teams to
achieve the progress to date.
Introduction to the team
delivering the raw water
project at Lickhill, including
supply partners. Detailed
safety induction to understand
how our health and safety
procedures operate in practice.
Christine spent time meeting
our supply chain partners’
teams, listening to their views
and experiences working with,
and for, Severn Trent on BRP.
The health and safety briefing
enabled Christine to observe
first- hand the robust health
and safety processes we have
in place for our workforce.
14.00
–
15.30
13.45
–
14.00
12.45
–
13.45
10.15
–
12.45
BRP FRANKLEY
SITE TOUR
TREATED WATER
SAFETY INDUCTION
Christine was accompanied by the
Contractor’s Project Director, the
BRP Project Director and the Treated
Water Technical Lead on a tour of the
new treatment works stream assets
at Frankley Water Treatment Works
commencing from Frankley reservoir.
Prior to undertaking a tour of the
site Christine undertook the safety
induction which is given to everyone
on site to ensure they are aware
of the hazards presented by the
existing treatment plant and the
construction work.
LUNCH AND
INTRODUCTION TO THE
TREATED WATER TEAM
The Technical Lead took Christine
through the new treatment process
using a 3D modelling tool to put
this new innovative process plant
into context.
INTAKE AND PUMPING
STATION SITE VISIT
Christine visited the Lickhill
intake, which has a gravity pipeline
running to the pumping station.
The station has the capability of
pumping 140 Ml/d of river water
along the 26 km pipeline to
Frankley water treatment works.
Christine observed the scale of
the treatment processes described
during the 3D model presentation
earlier in the day.
15.30
–
16.00
16.00
–
16.30
ELAN VALLEY
AQUEDUCT SCHEME
PROJECT
MILESTONE UPDATE
Christine received an overview
of the EVA scheme to understand
first-hand the scale of the scheme
and complexity of the connections
required.
Our BRP Programme Director
updated Christine on the final
milestones to be delivered to
complete the project.
86
BRP Frankley
Severn Trent Plc Annual Report and Accounts 2020 Dear Shareholder
This report details the role of the Nominations 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 and steps taken
by the Committee in the year ended 31 March 2020.
Chair introduction
I am delighted to have been given the opportunity to chair Severn Trent
Plc and the Board has been particularly welcoming to me. Following
my appointment to the Board, we completed a thorough recruitment
process for the role of an additional Non-Executive Director.
In line with the Principles of the Parker Review, the Board has been
actively looking to appoint a Non-Executive Director from a BAME
background for the last few years. After careful deliberation the
Committee unanimously recommended the appointment of an
outstanding candidate, Sharmila Nebhrajani, to the Board from
1 May 2020. The Committee recognises the importance and benefit
of greater diversity throughout our Company and on the Board itself.
Sharmila’s appointment continues our priority of diversifying our
Board and bringing different perspectives into our discussions,
in line with our Board Diversity Policy.
The Committee plays a key role supporting the Board within the
Governance Framework in reviewing the composition of the Board
and its Committees. During the year, we oversaw the evaluation of the
Board, its Committees and Directors. This includes assessing whether
the balance of skills, experience, knowledge and independence on
the Board is appropriate to enable it to operate effectively. Further
information about the Board Effectiveness evaluation can be found on
page 83. 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.
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.
Our senior leadership population is a source of future Executive
Committee talent, with three members of our Executive Committee,
James Jesic, Bob Stear and Shane Anderson, progressing through this
route. We’re proud of our continually evolving graduate, apprenticeship
and placement programmes. We have a total of 61 graduates in training,
with 20 places offered in 2019/20. We currently have five entry
programmes for graduates – Business Leadership, Finance, Technology,
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
15 roles in 2019. We currently have 104 apprentices in training. In 2019,
we launched two new apprenticeship programmes in Bioresources
and Quantity Surveying. We now have 12 active apprenticeship
programmes, and we expect these to increase to at least 14 in 2020.
We were a key partner in the development and implementation
of the water industry apprenticeships standards through the
Government’s Trailblazer initiative and we 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.
Director conflicts and independence
In March 2020, 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
87
Committee members
Christine Hodgson
Chair of the
Nominations Committee
Kevin Beeston
Senior Independent
Non-Executive Director
John Coghlan
Independent
Non-Executive Director
Andrew Duff
Outgoing Chair
(Retired from the Board
31 March 2020)
Sharmila Nebhrajani
Independent
Non-Executive Director
(Appointed 1 May 2020)
Dominique Reiniche
Independent
Non-Executive Director
Philip Remnant
Independent
Non-Executive Director
Angela Strank
Independent
Non-Executive Director
Quick links
Terms of Reference
Board Diversity Policy
T
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Quick facts
– All members of the Committee
in 2019/20 were Independent
Non-Executive Directors
of the Board, with the exception
of Andrew Duff and Christine
Hodgson (who were
independent on appointment).
– 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 2020.
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information
NOMINATIONS COMMITTEE REPORT
CONTINUED
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 2018 Code, all the Directors, with the exception
of Andrew Duff who retired from the Board on 31 March 2020, will
retire at this year’s AGM and submit themselves for appointment
or re-appointment by shareholders. Each of the Non-Executive
Directors seeking appointment or re-appointment are considered
to be independent in judgment and character.
Christine Hodgson
Chair of the Nominations Committee
19 May 2020
Focus areas in 2019/20
The Committee provides Board oversight that there are formal plans in place for an orderly succession to both Board and senior leadership
positions and oversees the development of a diverse pipeline for succession. The composition of the Board is regularly reviewed and refreshed
and there is a rigorous and transparent procedure for the appointment of Directors. The Committee leads the process for Board appointments
and makes recommendations to the Board. Some key areas of discussion for the Committee during 2019/20 included:
Key areas of discussion
Board succession planning, including oversight of the process to recruit our new Chair and Non-Executive Director ahead of making a
recommendation to the Board.
Review of how the Company involves employees, and considers the views of the workforce, in its decision-making processes and workforce
engagement mechanism.
Oversight of the Group’s diversity and inclusion policy and initiatives.
Executive Committee succession planning and talent development.
Approval of revised Terms of Reference, to be applied from 1 April 2020, prior to making a recommendation to the Board.
Gender Diversity % as at 31 March 2020
Group
Strategic leader and Director population
Apprentices and Graduates
2
1
2
1
2
1. Male
2. Female
4,875 (71%)
1,989 (29%)
1. Male
2. Female
36 (60%)
24 (40%)
1. Male
2. Female
BAME Diversity % as at 31 March 2020
Group
Strategic leader and Director population
Apprentices and Graduates
1
1
1. Ethnic minority
8.86%
1. Ethnic minority
6.67%
1. Ethnic minority
Diversity
As highlighted earlier in the report, the Board
and 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 56% and 36%
respectively). We are also very proud to have
both a female Chair and a female Chief Executive.
A breakdown by gender of the number of
persons who were Directors of the Company,
senior managers, as defined in the 2018 Code
and Companies Act 2006, and other employees
as at 31 March 2020 is set out opposite.
88
Board Diversity % as at 1 May 2020
Director gender split
Director BAME split
2
1
1. Male
2. Female
1. Ethnic minority
11%
44%
56%
1
124 (75%)
41 (25%)
1
1
19%
Severn Trent Plc Annual Report and Accounts 2020 Parker Review – BAME diversity
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 April 2020, 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.
The objectives and targets of the Policy, and an update against each
of them, are set out below. A copy of the Policy is available on the
Severn Trent Plc website.
Board Diversity Policy – Objectives and progress against targets
When recruiting for our new Chair and Non-Executive Director the Committee ensured that the recruitment processes were in line
with our Board Diversity Policy to include candidates from diverse backgrounds and those with non-listed company experience for
the Committee to consider. We were pleased to appoint Sharmila Nebhrajani on 1 May 2020 as a Non-Executive Director of the Company.
Sharmila went through a rigorous recruitment process overseen by the Committee and we are delighted to welcome Sharmila to the
Board and look forward to her contribution over her tenure with the Company.
Policy objectives
Implementation
Progress against objectives
Ensure the Board comprises
an appropriate balance of skills,
experience and knowledge
required to effectively oversee
and support the management
of the Company.
Ensure consideration is given
to candidates for Non-Executive
Director Board appointments
from a wide pool, including
those with no listed company
Board experience.
Ensure Board appointment ‘long
lists’ include diverse candidates,
including diversity of social and
ethnic backgrounds and cognitive
and personal strengths.
Annual review of the Board’s composition by
the Nominations Committee with particular
consideration being given to the balance of
skills, experience and independence of the
Board. The 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 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.
Ensure the Board and
Nominations Committee only
engage executive search firms
that have signed up to the
voluntary code of conduct on
gender diversity and best practice.
The Company only engages with executive
search firms that have signed up to the
voluntary code of conduct on gender and
BAME diversity and best practice.
Ensure focus is given to the
development of a pipeline of
diverse high calibre candidates
for Board level roles and report
annually on the diversity of the
Executive pipeline as well as the
diversity of the Board.
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 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.
Two Board appointments were made during the year:
(1) the Non-Executive Chair and (2) a Non-Executive
Director. The recommendations in respect of these
Board appointments were conducted in full consideration
of the Policy, 2018 Code and additional relevant guidance.
We were pleased to appoint a female Chair and a female
Non-Executive Director from a BAME background.
The Committee ensured that Korn Ferry presented a
diverse potential candidate list, including candidates
with no listed company Board experience.
Two Board appointments were made during the year: (1) the
Non-Executive Chair and (2) a Non-Executive Director. The
recommendations in respect of these Board appointments
were conducted in full consideration of the Policy, 2018 Code
and additional relevant guidance, with a selection of diverse
candidates being included in the long lists. We were pleased
to appoint a female Chair and a female Non-Executive
Director from a BAME background.
We continue only to engage with executive search firms
that have signed up to the voluntary code of conduct on
gender and BAME diversity and best practice.
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.
The diversity of our Executive pipeline is disclosed on page 88.
Policy Targets
Progress against Target
33% female share of Board
Directors by 2020.
Minimum of one Board Director
from an ethnic minority
background by 2021.
56% female representation on our Board as at 1 May 2020.
In line with the Principles of the Parker Review, the Board has been actively looking to appoint a
Non-Executive Director from a BAME background for a few years. The calibre of the candidates
identified in this year’s search was outstanding and it was after careful deliberation that the
Committee unanimously recommended the appointment of Sharmila Nebhrajani to the Board.
89
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CONTINUED
In advance of finalising the succession plans, the Company consulted with
the Group’s key stakeholders to inform them of the Chair Designate’s
appointment. During discussions with stakeholders, the Company
provided assurance that the Committee had factored the principles of
good corporate governance into its planning. This included the following
‘safeguards’ to ensure the separation of leadership between the Chair
and Chief Executive:
– The Chair’s appointment was for a three-year term, subject to
annual re-election by shareholders. The term can be renewed
by mutual agreement, up to a maximum term of nine years;
– The Chair was independent on appointment; and
– The responsibilities of the Chair and Chief Executive are
separate and clearly defined in our Charter of Expectations
which is subject to regular review.
Chair Succession
One of the key activities during the year was the Committee’s search
for a new Chair. This process was led by our Senior Independent
Director, Kevin Beeston, with support from the whole Board and
Bronagh Kennedy, Company Secretary. A summary of the process
overseen by Kevin Beeston is set out below. Kevin Beeston chaired
all meetings of the Committee when it met to discuss the appointment
of Andrew Duff’s successor.
In line with the provisions of the Board Diversity Policy, the executive
search firm selected by the Company, Korn Ferry, was signed up to
the voluntary code of conduct on gender and BAME diversity and best
practice. You can find additional detail in this report on page 89.
A key factor in the Chair succession plan was the importance
of retaining the culture of the Group, which is a valuable core
strength of Severn Trent. The Committee was clear that as part
of the recruitment process for the new Chair due consideration
had to be given to the suitability of the candidate to continue to
build on the Company’s purpose, values and culture. The Board
approved the Chair’s role specification and the Committee provided
regular feedback to the Board throughout the recruitment process.
Extensive references were sought in respect of the preferred
candidates, from investors, peers and companies they had worked
for. It was after careful deliberation that the Committee unanimously
recommended the appointment of Christine Hodgson as Chair
Designate of the Company.
Chair succession planning process in action
One of the key activities during the year was the Committee’s search for a new Chair. This process was led by our Senior Independent
Director, Kevin Beeston, with support from the whole Board and Bronagh Kennedy, Company Secretary. A summary of the Chair
succession process in action can be found below.
1
2
Production of a detailed
candidate brief and role
specification prepared by
the Senior Independent
Director, CEO and
Company Secretary
Review of external search
providers – all of which
were signed up to the
voluntary code on gender
and BAME diversity
7
The Senior Independent
Director and Company
Secretary reviewed the
long list and selected
candidates to proceed to
short list stage
8
All shortlisted
candidates met with
each Board member
on a one-to-one basis
3
Selection and
appointment of Korn
Ferry – who does not
have any other
relationship with
Company or individual
Directors. The Committee
and Board were satisfied
that the Company, and
individual Directors,
did not have any other
connection with
Korn Ferry
9
Extensive external
referencing was sought
and individual Director
feedback was discussed
and considered at
Committee meetings
4
The Senior Independent
Director and Company
Secretary provided
a detailed brief to
Korn Ferry on the
candidate brief and
role specification
5
Korn Ferry spent two
days with Severn Trent to
understand the Group’s
culture and further
inform the search
6
The Senior Independent
Director and Company
Secretary held weekly
meetings with
Korn Ferry throughout
the search. Regular
updates were provided
to the Committee
10
11
Preferred candidate
selected
Pre-appointment meeting
held with Ofwat
12
The Committee made
its recommendation
to the Board
Following Christine’s appointment, the Committee implemented
its plan to induct her as Chair to work alongside Andrew Duff
before her appointment as Chair.
Christine brings extensive board and governance experience to the
Company as well as a deep understanding of business, finance and
technology leadership. She is a committed advocate of the need for
companies to serve all of their stakeholders effectively and deliver
their social purpose. Following Christine’s appointment to the Board,
she embarked on an extensive induction programme. Further detail
can be found on page 85.
90
Severn Trent Plc Annual Report and Accounts 2020 Dear Shareholder
We have revised the format of our report this year to provide
shareholders with a clearer understanding of the work we have
done as a Committee to provide challenge and assurance on
the integrity of the 2019/20 Annual Report and Accounts and
the Group’s regulatory reporting requirements.
As a Committee, we assist the Board by establishing, reviewing
and monitoring the formal and transparent policies and procedures
to ensure the independence and effectiveness of the Internal and
External Audit functions, the integrity of financial and narrative
reporting, the Company’s internal control framework and the
adequacy of the process that enables the Board to assess the extent
of principal risks the Company is willing to take to achieve its long-
term strategic objectives. The Committee, and its individual members,
act in a way that we consider is most likely to promote the success of
the Company for the benefit of its members as a whole, including
shareholders, as set out in s.172 of the Companies Act 2006. This
ensures that the interests of our shareholders, and broader stakeholders,
are properly considered and reflected in our decision making processes.
We updated the Committee’s Terms of Reference this year to reflect
our continued commitment to this. Additional information on how
the Board, and Audit Committee, have considered stakeholders in
their decision making can be found on pages 28 to 29.
One of our key roles is to advise the Board that we are satisfied that
the Annual Report and Accounts are fair, balanced and understandable
and provide the information necessary for shareholders to assess the
Company’s position, performance, business model and strategy. In
doing so, we ensure that management’s disclosures reflect the supporting
detail or challenge them to explain and justify their interpretation
and, if necessary, re-present the information. The External Auditor
supports this process, in the course of its statutory audit, by auditing
the accounting records of the Company against agreed accounting
practices, relevant laws and regulations. Deloitte’s audit report can
be found on pages 130 to 136. We were pleased to advise the Board
that the 2019/20 Annual Report and Accounts are fair, balanced and
understandable and that Directors have provided the necessary
information for our shareholders to assess the Company’s position,
prospects, business model and strategy. Our review process is
described in further detail on page 93.
During the year, the Committee reviewed and agreed with management’s
proposal to maintain the Company’s long-term viability statement
to cover a seven-year period (see page 66). It was agreed that this
approach was appropriate given the nature of the regulatory regime
in the water sector and Ofwat’s statutory duty to secure that
companies can finance the proper carrying out of their functions.
You will see that this report contains an overview of the Company’s
whistleblowing arrangements (page 96). The Board carefully
considered the 2018 Code and in 2018/19 implemented many of the
new principles earlier than required, as disclosed in our 2018/19
Annual Report. As part of this process, the Board agreed that the
responsibility for oversight of whistleblowing arrangements should
continue to be delegated to the Audit Committee and Corporate
Sustainability Committee and not as a matter reserved solely to
the Board. However, the Board as a whole monitors and reviews the
effectiveness of the Group’s whistleblowing arrangements annually,
to ensure that it has sufficient oversight of whistleblowing to support
its work on culture, risk and stakeholder engagement. The Audit
Committee and Corporate Sustainability Committee continue to
receive reports on investigations and all significant whistleblowing
matters are reported directly to the Board. The Board continues to
receive regular updates from the Committees and completes an
assessment of the effectiveness of the Group’s whistleblowing
procedures. The Board has reviewed these arrangements again
this year and is satisfied that they are effective, facilitate the
proportionate and independent investigation of reported matters
and allow appropriate follow-up action to be taken.
91
Committee members
John Coghlan
Chair of the Audit Committee
Kevin Beeston
Senior Independent
Non-Executive Director
Sharmila Nebhrajani
Independent
Non-Executive Director
(Appointed 1 May 2020)
Philip Remnant
Independent
Non-Executive Director
T
I
D
U
A
T
R
O
P
E
R
E
E
T
T
I
M
M
O
C
Quick facts
– The Committee Chair
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 is authorised
to seek external legal or other
independent professional
advice as it sees fit, but did not
need to do so during the year.
Quick links
Terms of Reference
Non-Audit Services Policy
Anti-Bribery Policy
– All members of the Committee
are qualified accountants
and are considered by the
Board to have recent and
relevant financial experience
and competence relevant
to the sector.
– Other regular attendees at
meetings at the invitation of
the Committee included the
former Chairman of the Board,
the current Chair of the Board,
the CEO, the CFO, the Company
Secretary, the Head of Internal
Audit, the Group Financial
Controller, other members
of senior management,
representatives from the
External Auditor, Deloitte,
and non-financial operational
performance and data
assurers, Jacobs. None
of these attendees are
members of the Committee.
– The Committee regularly
holds private discussions
with the Head of Internal
Audit and the External Auditor
separately, without Executive
management present.
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information
AUDIT COMMITTEE REPORT
CONTINUED
Much of our work relates to the regulated activities of Severn Trent
Water, which represents over 98% of Group revenues, and Hafren
Dyfrdwy. This reflects our continued commitment to our shareholders
and other stakeholders, particularly our customers and regulators.
I would like to thank the members of the Committee, the management
team, Internal Audit, Deloitte and Jacobs for their continued commitment
throughout the year, for the open discussions that take place at our
meetings, and for the contribution they all provide in support of our work.
The annual Board Effectiveness evaluation assessed our performance
as a Committee and I’m pleased that this concluded that we operate
effectively and that the Board takes assurance from the quality of
our work. The Board is satisfied that the Committee members bring
a wide range and depth of financial and commercial experience across
various industries and all members have competence relevant to our
sector with significant recent and relevant financial experience. You
can read more on page 83.
John Coghlan
Chair of the Audit Committee
19 May 2020
Focus Areas in 2019/20
The Committee has an extensive agenda focusing on the audit, assurance and risk processes within the business which it deals with
in conjunction with management, the External Auditor, Internal Audit and the finance and regulatory compliance and assurance team.
For all Board and Committee Statements we have a detailed proof-point process that provides assurance to the Board and Committee that
an appropriate level of assurance activity has been undertaken with satisfactory findings. Throughout this activity, we ensure that high
standards of financial governance, in line with our regulatory framework as well as market practice for audit committees, are maintained.
There were four scheduled meetings of the Committee during the year. Key items of business considered during the year are set out below.
Key areas of discussion
Reviewed the long-term viability statement, in particular the maintenance of the period at a seven-year term (including scenario testing), prior to
making a recommendation to the Board. It was agreed that this approach was appropriate given the nature of the regulatory regime in the water
sector, including Ofwat’s statutory duty to secure that companies can finance the proper carrying out of their functions. The Committee reviewed
and confirmed this recommendation having carefully considered the potential impacts of the COVID-19 outbreak. Additional detail can be found
in our viability statement on page 66.
Reviewed the basis of preparation of the financial statements as a going concern (prior to making a recommendation to the Board) as set out in
the accounting policies.
Internal Audit
– Considered Internal Audit reports presented to the Committee and satisfied itself that management had resolved or was in the process
of resolving any outstanding issues or actions.
– Reviewed and approved the approach and Internal Audit plan for 2020/21.
– Reviewed the quality and effectiveness of Internal Audit and the effectiveness of the current co-source arrangements.
External Auditor
– Reviewed the proposed audit plan for the 2019/20 statutory audit, including the key audit risks and level of materiality applied by Deloitte,
audit reports from Deloitte on the financial statements and the areas of particular focus for the 2019/20 audit. Management continues
to make continual improvements to the Group’s internal controls and risk management systems.
– Assessed the effectiveness of the External Auditor and made a recommendation to the Board on the reappointment of Deloitte as the External Auditor.
– Agreed the statutory audit fee for the year ended 31 March 2020 and agreed the fee approach for subsequent years.
– Reviewed and approved the non-audit services and related fees provided by the External Auditor for the year and approved the updated policy
on non-audit services provided by the auditor for 2020/21.
Reviewed and discussed the reports from the Chief Financial Officer on the financial statements, considered management’s significant accounting
judgments, and the policies being applied and assessed the findings of the statutory audit in respect of the integrity of the financial reporting in
respect of full and half year results.
Reviewed the integrity of the regulatory reporting process relating to the annual performance reports, and other regulatory submissions, for
Severn Trent Water and Hafren Dyfrdwy as required to be submitted to Ofwat.
Reviewed the 2019/20 Annual Report and Accounts and provided a recommendation to the Board that, as a whole, they complied with the 2018 Code
principle to be ‘fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s position,
performance, business model and strategy’.
Reviewed the effectiveness of the risk management and internal control systems prior to making a recommendation to the Board.
Monitored fraud reporting and incidents of whistleblowing, including a review of the adequacy of the Group’s whistleblowing processes and
procedures, prior to reporting to the Board on this activity.
Oversight and monitoring of the Group’s compliance with the Bribery Act 2010, including a review of the adequacy of the anti-bribery, corruption
and fraud processes and procedures (and associated policies).
Review and approval of the Committee’s Terms of Reference, to be applied from 1 April 2020, prior to making a recommendation to the Board.
Separate, dedicated meetings were held to consider the PR19 plans for Severn Trent Water and Hafren Dyfrdwy.
92
Severn Trent Plc Annual Report and Accounts 2020 Fair, Balanced and Understandable (‘FBU’) reporting
At the request of the Board, the Committee has considered whether, in its opinion, this Annual Report and Accounts, taken as a whole, is
fair, balanced and understandable and whether it provides the information necessary for shareholders to assess the Company’s position,
performance, business model and strategy.
The following process was followed by the Committee in making its assessment:
1
2
3
4
5
The Committee reviewed the Annual Report at an early stage, and
throughout the process, to enable sufficient time for comment
and review and ensure overall balance and consistency.
Internal Audit reviewed the Annual Report and oversaw a
verification process for all factual content and reported back
to the Audit Committee on its assessment and findings.
The Committee reviewed and approved the process in place to
support the FBU assessment and reviewed the findings of this
process. We were satisfied that all the key events and issues
reported to the Board by management (both positive and negative)
had been adequately referenced or reflected within the Report.
The External Auditor presented the results of its audit work.
The significant issues we considered as a Committee were
consistent with those identified by the External Auditor in
its report (see pages 130 to 136 for more detail).
The Board approved the Committee’s recommendation that
the FBU statement could be made, which can be found in the
Directors’ Responsibilities Statement on page 129 of this Report.
5
Recommendation
to Board
4
External Auditor
Review
1
Regular Audit
Committee
Review
3
FBU
Assessment
2
Internal Audit
Verification and
Oversight
External Auditor
As a Committee, we have primary responsibility for overseeing
the relationship with the External Auditor, including assessing
its performance, effectiveness and independence annually
and making a recommendation to the Board in respect of its
reappointment or removal.
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. Under independence rules, Kari will be rotating following
completion of the 2019/20 statutory audit and Jacqui Holden will oversee
the audit for 2020/21. Further information on Jacqui Holden’s experience
can be found on the Deloitte website. The Committee anticipates that
the next competitive tender will be conducted no later than 2025 in
accordance with current regulation that requires a tender every
10 years. Deloitte will not be able to participate. The proposed tender
date is in the best interests of members and the Company as Deloitte
has a detailed knowledge of our business, an understanding of our
industry and continues to demonstrate that it has the necessary
expertise and capability to undertake the audit.
The Company has complied with the provisions of the Competition
and Markets Authority’s Order for the financial year under review
in respect to audit tendering and the provision of non-audit services.
Effectiveness of the External Auditor
The Committee considers the effectiveness of the External Auditor
every year and a full effectiveness review was conducted this year.
This involved assessment of the Auditor by the Committee, key
Executives and relevant senior management including an evaluation
of whether the Auditor met the minimum standards of qualification,
independence, expertise, effectiveness and communication. All
members of the Committee, as well as key members of management
and those who have regular contact with the External Auditor,
completed a feedback questionnaire focusing on the below areas:
– Robustness of the External Audit process and degree of challenge to
matters of significant audit risk and areas of management subjectivity.
– Appropriateness of the scope of the audit and the planning process
for the delivery of an effective and efficient audit.
– Quality of the delivery of the audit, the service provided by
the External Auditor and its knowledge and understanding
of Severn Trent’s business.
– Expertise of the audit team conducting the audit.
– Degree of independence applied by the External Auditor and
that policies and procedures were consistently applied.
– Views on the quality of the interaction between the audit partner
and senior members of the audit team and the Company.
– Whether the statutory audit contributed to the integrity of the
Group’s financial reporting.
The feedback was collated and presented to the Committee in
March 2020. We discussed the conclusions and any opportunities
for improvement, which were brought to the attention of the External
Auditor. No significant issues were reported as part of this process
and we concluded that the External Audit process and services
provided by Deloitte were satisfactory and effective. The feedback
was shared with Deloitte and an action plan has been drawn up with
them and built into the 2020/21 audit programme.
External Auditor independence and non-audit services
To preserve objectivity and independence, the External Auditor is
not asked to provide other services unless it is in the best interests
of the Company that these are provided by Deloitte rather than
another supplier, in accordance with our Non-Audit Services Policy.
We reviewed and updated the policy during the year to reflect the
FRC’s new Ethical Standard and the more restrictive list of services
that are now permitted. The Policy requires Committee approval for
all non-audit services. The Policy also prohibits aggregate fees for
non-audit services in excess of 70% of the average audit fee for
the previous three financial years. Non-audit services where the
External Auditor may be used include: audit-related services
required by statute or regulation and other audit or assurance
services as set out in the Ethical Standard.
During the year, Deloitte received £689,000 in fees for work relating
to the audit services it provides to the Group. Non-audit related work
undertaken by Deloitte amounted to fees of £188,000 this year, which
amounts to 27.3% of the total audit fees paid to it (as shown in the chart
on page 94). The more significant non-audit services provided by
Deloitte were the audits of the financial information contained within
93
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information AUDIT COMMITTEE REPORT
CONTINUED
the Severn Trent Water and Hafren Dyfrdwy Annual Performance
Reports and the independent review of the Company’s half-yearly
financial report. Audit and non-audit fees paid to Deloitte are set
out in note 7 to the financial statements on page 154.
In approving these non-audit fees, we 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. Where
Deloitte was chosen, this was as a result of its detailed knowledge
of our business and understanding of our industry as well as
demonstrating that it had the necessary expertise and capability
to undertake the work cost effectively.
Internal Audit and internal controls
Internal Audit is an independent assurance function available to the
Board, Audit Committee and all levels of management and is supported
by three main co-sourcing partners, PricewaterhouseCoopers, Ernst
and Young and BDO. These arrangements are reviewed annually and
we believe 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 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; this is supported by regular
reporting that enables us to monitor delivery of the audit plan. Our role
as a Committee is to challenge the plan, specifically whether the key
risk areas identified as part of our ERM process are being audited with
appropriate frequency and depth. Individual Committee members also
bring an external view of risks the Company may be exposed to.
Following the completion of each planned audit, Internal Audit seeks
feedback from management and reports to the Committee on the
findings of the audit, including any action that may be required. Where
any failings or weaknesses are identified in the course of the review
of internal control systems, management puts in place robust actions
to address these on a timely basis. Action closure is reported to and
monitored by the Committee and we are pleased to confirm that our
review established that management places a strong focus on closing
audit actions and ensuring timely completion.
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, we carried out a review of the
effectiveness of the Internal Audit function 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. An internal review was also carried out during the year.
Risk management
The Group has a risk management process in place through which our
principal risks and related controls are identified and assessed. The
Board has overall responsibility for setting the Group’s risk appetite and
ensuring that there is an effective risk management framework and has
delegated responsibility for review of the risk management methodology
and effectiveness of internal controls to the Audit Committee.
We review the processes for, and outputs from, the Group’s ERM
process, through which our principal risks and related controls are
identified. We also review the effectiveness of the risk management
system on behalf of the Board and keep under review ways in which we
can enhance the control and assurance arrangements. We received
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. Individual risk
‘flightpaths’ facilitate a more thorough review of the target risk positions,
consider risk appetite and assess whether actions are on target, with
Audit and Non-Audit Fees 2019/20
(£m)
Statutory audit – Group company
Regulatory audit services provided by the statutory auditor
Statutory audit – subsidiaries
Other non-audit services
0.2
0.2
0.2
0.4
0.4
0.5
0.1
0.1
Total fees
0.1
0.1
Total fees
£0.8m
£0.8m
2017/18
Details of significant non-audit work undertaken is set out below.
2018/19
0.1
0.1
Total fees
£0.9m
2019/20
Nature of service
Reason for Deloitte’s appointment
Fees (£’000)
Audit related assurance services
Interim review
Assurance of regulatory returns
This work is akin to an audit and is expected to be performed by the External Auditor.
The same safeguards that apply to the full-year External Audit also apply to this work.
Audit of sections 1 and 2 of the Severn Trent Water and Hafren Dyfrdwy Annual
Performance Reports is closely related to the External Auditor’s statutory audit
work and the two assignments are performed in parallel.
Reporting under Group
financing documents
These documents require reports and it is normal practice for the External Auditor
to provide these.
Subtotal
Other assurance services
Other assurance
Subtotal
Total 2019/20 non-audit fees
94
54
79
38
171
17
17
188
Severn Trent Plc Annual Report and Accounts 2020
Significant issues considered and addressed in relation to the financial statements
We looked carefully at those aspects of the financial statements that required significant accounting judgments or where there is
estimation uncertainty. These areas are explained in note 4 to the Group financial statements. We received detailed reports from
both the CFO and the External Auditor on these areas and on any other matters which they believed should be drawn to our attention.
The draft External Auditor’s report on the financial statements was also reviewed, with particular reference to those matters reported
as carrying risks of material misstatement.
We discussed the range of possible treatments both with management and with the External Auditor confirming that the judgments
made by management were robust and supportable. For all of the matters described below the Committee concluded that the treatment
adopted in the Group financial statements was appropriate.
Significant Issue
How the issue was addressed by the Committee
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 2020, the provision in the Group’s financial statements was
£141.7 million and the charge for the year was £42.9 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.
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.
In particular the Committee considered the scenarios modelled in relation
to the impact of the COVID-19 outbreak on the Group’s financial position
and prospects, noting the stress tests performed by management and the
potential mitigating actions identified.
Our business model can be found on pages 6 to 7.
Principal risks and uncertainties can be found on page 58.
The viability statement can be found on page 66 and the going concern
statement on page 68.
The Committee scrutinised the changes made to the methodology for
calculating the provision during the year and critically appraised
management’s explanations for these changes. The Committee also
challenged management’s assumptions regarding the impact of the
COVID-19 outbreak on the expected credit losses for trade receivables
existing at 31 March 2020, noting the independent forecasts of the likely
economic impacts and the historical evidence indicating a link between
macroeconomic conditions and the Group’s bad debt experience.
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 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 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.
Determination of the amount of the Group’s retirement benefit obligations.
At 31 March 2020, net retirement benefit obligations amounting to
£234.0 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.
Furthermore, in the current year more judgment was required in assessing
the fair values of the schemes’ assets as a result of the impact of the
COVID-19 outbreak on asset valuations.
Consideration of whether the Group’s loans to its joint venture, Water Plus,
should be classified as long-term interests that in substance form part of
the Group’s net investment in the joint venture.
At 31 March 2020 the Group had loans receivable from the joint venture
amounting to £102.4 million comprising a revolving credit facility of
£92.6 million and Zero Coupon Subordinated Loan Notes of £9.8 million.
The Group’s share of the joint venture’s net assets at 1 April 2019 was
£37.0 million and the Group’s share of the joint venture’s loss after tax
for the year ended 31 March 2020 was £51.5 million. The Group’s share
of the joint venture’s losses is recognised up to the amount of the Group’s
net investment. The Group has classified the Zero Coupon Subordinated
Loan Notes as part of its net investment but considers the revolving credit
facilities not to form part of its net investment in the joint venture.
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.
The Committee scrutinised the assumptions underlying the valuation of the
obligations, and obtained explanations for the significant reduction in the
deficit recorded. 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.
The Committee also scrutinised the methodologies applied in assessing
the fair values of the schemes’ assets and considered the estimation
techniques used for assets where an up to date valuation was not available.
The Committee considered that the assumptions and methodologies were
reasonable, and that no adjustment was required to the draft Group
financial statements.
The Committee probed management’s rationale for its decision not to
classify the revolving credit facilities as part of its net investment in the
joint venture, scrutinising the nature of the arrangements, considering
the plans for recovery of the amounts loaned and the expected periods
for the amounts advanced.
The Committee considered that the judgments were reasonable and
reflected the substance of the arrangements.
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CONTINUED
Significant Issue
How the issue was addressed by the Committee
Classification of share of Water Plus loss as an exceptional item.
In the year ended 31 March 2020 the Group has recorded its share of loss
from its joint venture, Water Plus, as an exceptional item. The loss recognised
was £46.8 million. The Group’s accounting policy defining exceptional items
is set out in note 2 to the financial statements. Further details of the
components of this loss are set out in the CFO’s review on page 51.
Classification of the deferred tax charge arising from the change of tax
rate as exceptional.
In the year ended 31 March 2020 the Group has recorded the £91.8 million
deferred tax charge arising from the change of prospective corporation
tax rate from 17% to 19% as an exceptional charge. The charge arises from
restating the net provision for deferred tax from 17% to 19%, the rate that
is now expected to apply when the net liability is settled.
The Committee noted the accounting policy and management’s analysis of the
loss incurred by Water Plus, which indicated that £14.3 million arose from trading
activities in the year excluding the impacts of COVID-19 and that £32.5 million
arose from asset impairments resulting from COVID-19. The Committee
considered that the impacts of COVID-19 were exceptional within the parameters
of the Group’s accounting policy since the impact was material and unusual.
The Committee noted the requirement of IAS 28 that the share of loss of
joint ventures be presented as a single figure in the income statement. The
Committee questioned the rationale for presenting the loss as exceptional, in
view of the element that arose from the underlying trading of the joint venture
and noted management’s explanation that the COVID-19 related losses were
the significantly larger portion of the total loss.
Having considered the explanations provided by management, the accounting
requirements of IAS 28 and the views of the External Auditor, the Committee
concluded that presentation of the share of loss of joint ventures as
exceptional was the most useful available under the requirements of IAS 28.
The Committee noted that the Group’s accounting policy for exceptional items
applies to tax charges and credits. The Committee further noted that the
Group has a very significant deferred tax liability and that when prospective
changes to tax rates are enacted this results in a material charge or credit
in the income statement to reflect the change in the amount of the liability.
The Committee observed that the charge in this year’s financial statements
was the result of the reversal of the most recent proposed reduction in the
tax rate, which had been recorded as an exceptional credit in the income
statement, consistently with previous rate changes.
The Committee considered that the amount of the tax charge was material
and that separate presentation of its impact would make the tax charge in the
income statement more understandable.
Risk management (continued)
the correct prioritisation in place. Further details of the Group’s risk
management systems and controls and principal risks can be found
in the Strategic report on pages 1 to 68.
Whistleblowing
The Group has established procedures by which all employees may,
in confidence, report any concerns. Our Whistleblowing Policy ‘Speak
Up’ sets out the ethical standards expected of everyone that works
for, and with, us and includes the procedure for raising concerns in
strict confidence. Our workforce can raise concerns 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 both the Audit and Corporate Sustainability Committees.
The Board as a whole monitors and reviews the effectiveness of the
Group’s whistleblowing arrangements annually, to ensure that it has
sufficient oversight of whistleblowing to support its work on culture, risk
and stakeholder engagement. The Audit Committee receives reports on
investigations and all significant whistleblowing matters are reported
directly to the Board. The Board also receives regular updates from the
Committee and the Board completes an assessment of the effectiveness
of the Group’s whistleblowing procedures. The Board has reviewed
these arrangements again this year and is satisfied that they are
effective, facilitate the proportionate and independent investigation of
reported matters and allow appropriate follow-up action to be taken.
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. As part of our continual improvement process, an update on the Group’s ERM
process is scheduled to be discussed at the October 2020 Board.
Risk tolerance
Policy oversight
GAA | Doing the Right Thing | Group policies
Risk appetite
Delegated authority
THE BOARD
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
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Quick facts
– Other regular attendees at
meetings at the invitation of
the Committee included the
former Chairman of the Board,
the current Chair of the Board,
the Group Financial Controller,
and representatives from the
Group‘s financial advisers,
Rothschild. None of these
attendees are members
of the Committee.
– The Committee is authorised
to seek external legal or other
independent professional
advice as it sees fit, but did not
need to do so during the year.
Committee members
John Coghlan
Chair of the
Treasury Committee
James Bowling
Chief Financial
Officer
John Jackson
Group Treasurer
Philip Remnant
Independent
Non-Executive Director
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, and its individual members, act in a way that we
consider is most likely to promote the success of the Company
for the benefit of its members as a whole, as set out in s.172 of
the Companies Act 2006. This ensures that the interests of our
shareholders, and broader stakeholders, are properly considered
and reflected in our decision making processes. We updated the
Committee’s Terms of Reference this year to reflect our continued
commitment to this. Read more on pages 28 to 29.
During the year, a key area of focus for the Committee has been
considering and developing the Group’s Sustainable Finance
Framework, under which Severn Trent Plc and its subsidiaries
can raise debt to support the financing and/or refinancing of
assets and expenditures of a sustainable nature across their
activities. Additional detail can be found below.
The Committee has maintained its focus on the Group’s financing
strategy for the final year of AMP6 and AMP7, to ensure that the
Group remains in a strong financing position as it moves into the new
regulatory period. This included consideration of the Group’s credit
ratings and updating the Group’s funding strategy to reflect changing
market conditions and the risks and opportunities from the AMP7
regulatory allowance. In approving the Group’s AMP7 funding strategy,
the Committee also considered the impact of the Group’s long-term
financing strategy on AMP8 and beyond.
Following year end, the Committee has carefully considered and
closely monitored the potential economic impacts of COVID-19, in
particular on financing and liquidity. A key area of focus has been the
assessment of the Group’s compliance with the policy of maintaining
at least 18 months’ liquidity. At the balance sheet date, the Group’s
liquidity extended to early 2022. We continue to plan future funding
as part of our normal business planning process and the Committee
provides regular updates to the Board in respect of funding, solvency
and liquidity matters so that the Group can respond quickly to any
changes in our ability to secure financing.
The Group has been successful in accessing other capital markets
to diversify further its sources of funding, and replace the European
Investment Bank as a source of financing. I am delighted to report that
the Group also completed its first debt issue under the Sustainable
Finance Framework in March 2020 with a £200 million USPP debt
issue by Severn Trent Plc.
The annual Board Effectiveness evaluation assessed our performance
as a Committee and I’m pleased that this concluded that we operate
effectively and that the Board takes assurance from the quality of
our work. The Board is satisfied that the Committee members bring
a wide range of financial experience across various industries and all
members have competence relevant to our sector with significant
recent and relevant financial experience.
I would like to thank the members of the Committee, the management
team and our financial advisers, Rothschild, for their continued
commitment throughout the year, for the open discussions that take
place at our meetings, and for the contribution they all provide in
support of our work.
John Coghlan
Chair of the Treasury Committee
19 May 2020
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TREASURY COMMITTEE REPORT
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Focus Areas in 2019/20
The Committee provides Board oversight of the Group’s key financing risks and opportunities. Some key areas of discussion for the
Committee during 2019/20 included:
Key areas of discussion
Review of the Group’s European Medium Term Note Programme and approval for Bonds to be issued pursuant to that Programme during the year.
Oversight of the Group’s pension schemes and triennial actuarial valuation, ahead of making a recommendation to the Board in respect of the final
settlement of the 2019 actuarial valuations.
Discussion and approval of the Group’s AMP7 funding strategy, in consideration of the Group’s funding position and priorities for the remainder
of AMP6 and early AMP7, latest discussions with credit rating agencies and consideration of financial risks including the potential impacts of RPI
reform. In approving the Group’s AMP7 funding strategy, the Committee also considered the impacts of the Group’s long-term financing strategy
in respect of AMP8 and beyond.
Review and approval of the Group’s Sustainable Finance Framework and Group Treasury Policy Statement. Read more below.
Review and approval of the Committee’s Terms of Reference, to be applied from 1 April 2020, prior to making a recommendation to the Board.
In completing its review, the Committee concluded that the Terms of Reference remained appropriate and reflected the manner in which the
Committee was discharging its duties.
Read more: in our Sustainable Finance Framework
on our website
Sustainable Finance Framework
During the year, a key area of focus for the Committee has been
considering and developing the Group’s Sustainable Finance
Framework, under which Severn Trent Plc and its subsidiaries
can raise debt to support the financing and/or refinancing of assets
and expenditures of a sustainable nature across their activities.
Under the framework the Group can issue various funding
instruments, including:
– Committed facilities (revolving and term debt from banks and
institutional investors);
– Green, Social and Sustainable Bonds (all ‘Sustainable Bonds’);
– Private Placements (including US Private Placements); and
– Leases.
The Framework is based on the existing international standards:
– The Green Bond Principles (‘GBP’), Social Bond Principles (‘SBP’)
and Sustainability Bond Guidelines (‘SBG’) as published by the
International Capital Market Association (‘ICMA’) in June 2018; and
– The Green Loan Principles (‘GLP’) and Sustainability Linked Loan
Principles (‘SLLP’) as published by the Loan Market Association
(‘LMA’) in March 2018 and March 2019.
These principles are a set of voluntary guidelines that recommend
transparency and disclosure and promote integrity in the development
of the Green, Social and Sustainability Bond and Green and Sustainability
Linked Loan market by clarifying the approach for this type of financing.
We aim, where possible, to adhere to best practices in the market
and regularly review the Framework’s alignment to updated versions
of the principles as and when they are released. The Committee will
also review the EU Sustainable Finance Taxonomy, or its equivalent
following the UK’s departure from the EU, when it is published and
consider updates to the Framework accordingly.
The Committee is delighted to report that the Group completed its first
debt issue under the Sustainable Finance Framework in March 2020
with a £200.2 million USPP debt issue by Severn Trent Plc. This was
the first debt issue by Severn Trent Plc since 2012. The proceeds from
the debt issue will be used to finance and refinance expenditure by
Severn Trent Green Power Limited including the acquisition of Agrivert.
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Dear Shareholder
As Chair of the Corporate Sustainability 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 social purpose and Sustainability Framework. 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 delighted to report that we’ve had a particularly strong year in
our wide-ranging sustainability agenda, with the introduction of our
Triple Carbon Pledge. We also agreed to improve the biodiversity of
the land in our region through the Great Nature Boost, using nature-
based solutions to help reduce the need for chemical treatment
processes, supporting customers who are struggling to pay their
bills, and helping customers to improve their water efficiency. The
Committee spent a significant proportion of its time focusing on Severn
Trent’s role as an environmental leader, considering the Company’s
approach to climate change adaptation and mitigation, including our
new commitment to developing Science-Based Climate and Carbon
Targets, and submitting our first disclosure against the requirements
of the Task Force on Climate-related Financial Disclosures (‘TCFD’).
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
commitments. Reflecting the Committee’s broad role in reviewing
both the strategy and framework of our environmental, social and
corporate governance approach and also overseeing the Company’s
values, in March 2020 the Committee updated its name to the
Corporate Sustainability Committee. This year we reviewed our
Sustainability Framework, which draws together our environmental,
social and governance ambitions. While those ambitions will still be
delivered as part of our business plan, fully embedded in the way we
work, this framework helps us to articulate how we deliver our
purpose, and how the entire workforce participates in delivering it.
We are particularly pleased to report that the Sustainability Framework
is well embedded as part of our culture in Severn Trent and the entire
workforce participates in delivering this.
During 2019/20, the Committee reviewed the Group’s performance
across a range of sustainability commitments and analysed regular
whistleblowing reports. We had oversight of the Health, Safety and
Wellbeing Strategy and performance of the Company and were
pleased to report the introduction of the real Living Wage across
Severn Trent. We also reviewed our approach to modern slavery and
were pleased that our 2019 Modern Slavery Statement ranked 24th in
the Development International and BRE Global Governance FTSE100
Index review of FTSE100 companies.
Other matters we have focused on this year include employee
experience through our HR casework, the Company’s approach
and performance on social mobility and diversity and inclusivity.
The Committee reviewed our new Severn Trent Community Fund
which is our commitment to invest 1% of our profits each year in
community projects, providing an exciting opportunity to make a
positive impact in our region. The first grants were made available
in April 2020. A COVID-19 £1 million emergency fund was established
in March 2020 to support projects and charities directly affected by
COVID-19 in our region, with over £500k already donated to 200
organisations. Read more on page 4.
I should like to thank the members of the Corporate Sustainability
Committee for the open, constructive, ambitious and progressive
discussions that take place at our meetings and for their passion
and personal commitment to our wide-ranging and impactful agenda.
Angela Strank
Chair of the Corporate Sustainability Committee
19 May 2020
99
Committee members
Angela Strank
Chair of the Corporate
Sustainability Committee
Andrew Duff
Outgoing Chair, Severn Trent Plc
(Retired from the Board
31 March 2020)
Olivia Garfield
Chief Executive
Christine Hodgson
Chair, Severn Trent Plc
Sharmila Nebhrajani
Independent
Non-Executive Director
(Appointed 1 May 2020)
Dominique Reiniche
Independent
Non-Executive Director
Quick facts
– The members of the Committee
in 2019/20 were Non-Executive
Directors of the Board and the
Chief Executive.
– Only members of the
Committee have the right to
attend Committee meetings.
Other individuals such as 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 2020
to reflect the developing
sustainability agenda.
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information
CORPORATE SUSTAINABILITY REPORT
CONTINUED
Focus Areas in 2019/20
The Committee provides Board oversight for the promotion of our values and standards that relate to the social and economic community in
which the Company operates, in accordance with the Company’s Corporate Sustainability Framework, ensuring the Company can demonstrate
that it lives through these values and can act responsibly in its engagement with all stakeholders in this community, locally and nationally. The
Committee also oversees the approach of environmental standards, particularly those that relate to the activities where Severn Trent has its
most significant environmental impacts in respect of energy management and climate change, water quality, resource productivity (including
leakage and waste), biodiversity and land use. Some key areas of discussion for the Committee during 2019/20 included:
Key areas of discussion
Corporate Sustainability Performance Report – quarterly update on all strategic elements.
Oversight of the Company’s Sustainability Framework.
Oversight of environmental leadership (including our Triple Carbon Pledge), Climate Change Adaptation and Mitigation and Pollution
Incident Reduction Plan.
Approval of the use of Science-Based Targets and strategy for the Company’s approach to the requirements of the Task Force on Climate-related
Financial Disclosures (‘TCFD’).
Update on the Company’s Capital Markets Day based on the Company’s Sustainability Framework.
Oversight of the Group’s diversity and inclusion performance.
Consideration of the Severn Trent Community Fund set up and approach.
Review and approval of the Anti-Slavery and Human Trafficking Statement 2020.
Review of Severn Trent’s Health, Safety and Wellbeing Strategy and performance.
Review of our support for vulnerable customers.
Oversight of the Company’s real Living Wage accreditation.
Approval of revised Terms of Reference, to be applied from 1 April 2020, prior to making a recommendation to the Board.
Consideration of employee experience through HR casework.
Review of whistleblowing reports.
BEING SOCIALLY PURPOSEFUL
OUR SUSTAINABILITY FRAMEWORK
TAKING CARE OF THE
ENVIRONMENT
HELPING
PEOPLE TO
THRIVE
BEING A
COMPANY
YOU CAN TRUST
Ensuring a sustainable
water cycle
Delivering an affordable
service for everyone
Living
our Values
Enhancing our
natural environment
Providing a fair, inclusive
and safe place to work
Balancing the interests
of all our stakeholders
Making the most
of our resources
Investing in skills
and knowledge
Running our company
for the long term
Mitigating
climate change
Making a positive difference
in the community
Being open about what
we do and sharing what
we know
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Severn Trent Plc Annual Report and Accounts 2020 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
Company 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.
The Company Forum also provides an invaluable opportunity for
engagement with the whole workforce to ensure workforce views
are taken into account.
Responsible business practices are an integral part of our business
strategy. Performance against our Corporate Sustainability
commitments is reported throughout our Annual Report and
Accounts, reflecting their embedded nature. You can read more
in our Sustainability Report and on our dedicated Sustainability
webpages, on the Severn Trent Plc website.
Read more: in our Sustainability Report on our website.
Acting in a responsible manner is integral to our purpose of taking
care of one of life’s essentials and having a socially purposeful culture
throughout the Company. We hold ourselves to account against our
Framework and agreed metrics through an effective performance
management system. Our Corporate Sustainability performance is
embedded within the organisation, with customer ODIs linked to the
majority of our metrics, enabling the Company to focus on issues
important to our customers.
Performance against the Framework will be regularly reported
to the Committee, in our Annual Report and Accounts, on our website
and through selected Environmental, Social and Governance (‘ESG’)
indices. You can read more in our first standalone Sustainability Report
available on the Severn Trent Plc website.
Employee rewards are directly linked to our Corporate Sustainability
performance, with customer ODIs, health and safety and our key
metrics contributing to a third of all-employee annual bonus.
We believe that by focusing on the issues most important to our
customers, our Framework has the right focus.
The Committee ensures that, in considering the matters before
them, we take into account the Severn Trent Purpose and Values,
and alignment with Doing the Right Thing. You can read more on
page 14.
Whistleblowing
Our employees, and wider workforce, know they can raise concerns to
their line manager or by contacting a member of the Executive, the HR,
Legal and Internal Audit teams or through our independent whistleblowing
helpline, ‘Safecall’. Every single allegation is independently investigated
and reported to the Corporate Sustainability Committee and the Audit
Committee. In our most recent survey employees were asked if they
felt confident that something would be done if they raised a concern.
The Committee is pleased to report that our score on this question
put us in the top 10% of energy and utility companies worldwide.
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 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, and a separate
Anti-Slavery and Human Trafficking statement.
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. 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.
This year we have focused on education and raising awareness,
creating a bespoke e-learning training module. 97% of our employees,
excluding our customer contact centre teams, have completed it and
98% said they felt more confident reporting modern slavery following
completion of the module. Targeted awareness will be rolled out to
our customer contact centre teams over the next 12 months.
Our full Anti-Slavery and Human Trafficking Statement can be found
on the Severn Trent Plc website.
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Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information Dear Shareholder
On behalf of the Remuneration Committee (‘the Committee’),
I am pleased to provide an overview of our work in relation to
both Executive Director and wider workforce remuneration for
the year ended 31 March 2020. The final year of the five-year Asset
Management Period (‘AMP’) cycle is a period for both reflection
and anticipation. This has been a year of achievement to be proud
of and a culmination of strong performance throughout the AMP,
reflected in the remuneration across the entire workforce.
I am immensely proud of seeing our teams adjust how they work
to ensure we continue to provide our essential service during
COVID-19. The health, safety and wellbeing of our colleagues,
customers and communities have never been more crucial. We are
fortunate to be in a position to provide stability and security of pay
for our workforce, very many of whom are classified as key workers,
through this difficult period, announcing that we will continue to pay
our all-employee annual bonus and have agreed a three-year pay
deal, as well as a commitment not to furlough or make redundancies
as a result of COVID-19.
At the same time, we are actively offering support to our customers
and communities through a range of initiatives, more information on
which can be found on pages 10 to 11. We have announced that Christine
Hodgson, our Chair, Liv Garfield, our CEO, and James Bowling, our CFO,
have asked the Company to reduce their salaries by 25% for the first
quarter of 2020/21 and to donate the equivalent amount to local charities
in our region which are helping the response to COVID-19.
Further details of the decisions which the Committee has made
in respect of key components of executive remuneration as a
consequence of COVID-19 are summarised on page 104.
As we enter the new AMP, we continue with the same enthusiasm
and dedication to strive for high performance. We have strong
relationships between all components of remuneration and company
financial drivers, as well as strong alignment across the workforce.
The Directors’ Remuneration report (‘the report’) this year also sets
out the strategy and approach as we enter the 2021 Remuneration
Policy (‘the Policy’) review.
During the year, the Committee has taken full account of the 2018
Corporate Governance Code (the ‘2018 Code’) in our discussions and
remuneration practices. Our approach has always been for best
practice reporting, disclosure and transparency and for consistent
treatment of executive remuneration when compared with the
treatment of the wider workforce. As we navigate the impact of
the current global pandemic, we remain firmly committed to
these guiding principles.
Further comment on our overall performance during the financial
year is set out in the CEO’s review on page 12, and highlighted in
the At a Glance and Annual Report on Remuneration sections
later in this report.
Our all-employee bonus scheme
Last year we communicated changes to our all-employee bonus
scheme which further strengthened the alignment between
reward outcomes and strategic priorities for all colleagues,
including our Executive Directors.
The commitment to delivering profit before interest and tax (‘PBIT’)
remains a significant indicator, attracting 49% of bonus. Further
changes rebalanced the focus on Outcome Delivery Incentives
(‘ODIs’) which, through a mechanism of reward or penalty, measure
performance against the areas that customers have told us matter
most as well as our broader environmental responsibilities. We
also include 8% which is dedicated to initiatives which ensure the
Health, Safety and Wellbeing of colleagues and a further 8% which
is based on Customer Experience (‘C-MeX’). These, together with
the ODIs, make up the remaining 51% of the bonus. The changes
to the bonus scheme were received positively by our employees
and major shareholders.
Philip Remnant
Chairman of the
Remuneration Committee
Kevin Beeston
Senior Independent
Non-Executive Director
Andrew Duff
Outgoing Chair, Severn Trent Plc
(Retired from the Board
31 March 2020)
Christine Hodgson
Chair, Severn Trent Plc
Angela Strank
Independent
Non-Executive Director
Quick facts
– The Committee’s Terms of
Reference were updated in
March 2020 and are available
on the Severn Trent website,
alongside the Remuneration
Policy which was approved at
the Annual General Meeting
on 18 July 2018.
– All Committee members are
independent Non-Executive
Directors, as defined under the
2018 UK Corporate Governance
Code, with the exception of
the Company Chair who was
independent on appointment.
Full biographies of the
Committee members can
be found on pages 72 to 73.
– The Committee members
have no personal financial
interest, other than as
shareholders, in the matters
considered by the Committee.
– Committee attendance
during the year can be
seen on page 73.
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Section contents
Chairman’s letter
Remuneration At a Glance
Summary of
Remuneration Policy
and Implementation
Company Remuneration
at Severn Trent
Annual Report
on Remuneration
102
105
108
112
120
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Severn Trent Plc Annual Report and Accounts 2020
Ensuring alignment with the Corporate Governance Code
Last year we introduced several changes to ensure that our approach
to governance and disclosure reflected changes to the 2018 Code.
This year the Committee has also agreed, and communicated to
shareholders, the approach regarding the alignment of Executive
Directors’ employer pension contributions with those of the wider
workforce and post-cessation shareholding requirements, both of
which are covered in more detail in this section. This year we have
also published our CEO pay ratio and we are pleased to present
two years’ worth of information for 2018/19 and 2019/20.
Remuneration for the year under review
The full Policy can be found on the Severn Trent Plc website and on
pages 120 to 128 in the 2018 Directors’ Remuneration report. Through
our At a Glance Section, on page 105, we summarise the performance
outcomes against our remuneration framework, in the context of how
the Policy was applied in 2019/20.
– We have retained 1.39 times the base RoRE return as our target into
the new AMP for the Severn Trent Plc LTIP in spite of the demanding
regulatory settlement. This ensures that we are building in a further
challenge to this element of remuneration. Maximum payouts
continue to be measured against upper quartile (‘UQ’) stretch RoRE
performance. To be fully rewarded, management must continue to
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.
– As we enter AMP7, we will continue to apply a consistent bonus
scheme design from the front line to Executive Directors, ensuring
that every employee is incentivised and rewarded to deliver the
same shared objectives. The focus of the bonus remains a combination
of ODI and PBIT performance. We have also looked at how we can
make the ODI measures more meaningful to employees in roles
which directly impact these metrics. In the 2020/21 scheme, we will
articulate the ODIs in language which brings to life how we work.
The annual bonus will pay out at 74% of maximum opportunity,
equivalent to 88.8% of salary for both the CEO and CFO, and at their
request the full amount will be paid in shares, 50% of which will be
deferred for three years.
The 2017-20 Long Term Incentive Plan (‘LTIP’) has vested at 100%,
driven by the continued strong cumulative performance of our Return
on Regulated Equity (‘RoRE’) over the three-year performance period.
The component parts of RoRE are ODIs, financing and Totex (total
capital and operational expenditure).
The Committee believes that the outcomes of the annual bonus and
LTIP accurately reflect the performance of the Company over this
period. No discretion has been exercised by the Committee to override
the formulaic outcomes of either the 2017 LTIP or the 2019/20 annual
bonus, nor has the share price performance over the vesting period
been such to cause the Committee to adjust the level of vesting under
the LTIP.
Our People at Severn Trent
Our ongoing focus on greater visibility of remuneration across our
entire spectrum of workforce initiatives has led to the creation of
a new section in the Strategic report on page 20. The Our People
section showcases our broader people initiatives, activities and
accomplishments in the areas of diversity, inclusion, culture,
engagement and social mobility, and highlights how these link
to our new Purpose and Values, set out in more detail on page 14.
The Company Remuneration section on page 112 now focuses wholly
on pay and reward, and explains how the Committee has satisfied
itself, over the course of the year, that a fair and consistent approach
is applied to both the remuneration of the Executive Directors and
the wider workforce.
Remuneration in the year ahead
Our commitment to delivering a leading and transparent remuneration
framework is fundamental to strong governance processes and is
designed to embed our Values across the Company to deliver long-term
success. As mentioned above the Chair, CEO and CFO have voluntarily
donated 25% of their salary during the first quarter to support local
charities in our region.
Some future developments are outlined below:
– As a Committee, we believe that the alignment of all-employee
interests is key to the Company’s long-term success. With this
principle in mind, and prior to next year’s Policy review, it has
been agreed that employer pension contributions for our Executive
Directors and members of the Severn Trent Executive Committee
will be aligned with the maximum 15% contribution available to
members of the Severn Trent Group Pension Plan (the majority
of the wider workforce) by 1 April 2022. The Committee would
like to thank the Executive Directors for voluntarily supporting
the phased reduction of their employer pension contributions.
On page 109 we explain how the Policy will be implemented
for the Executive Directors in 2020/21.
The Policy Summary and Implementation section on page 108 outlines
how the Committee intends to implement the Policy in 2020/21.
Ongoing shareholder communication
In February 2020 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 the Company’s
approach to achieving pension alignment between Executive Directors
and the Company’s wider workforce (as mentioned above) as well as
clarifying how we intend to operate the LTIP performance targets for
awards made from 2020 onwards. These are within the remit of the
current Policy which is due for renewal in 2021.
In the unlikely event that Severn Trent achieves UQ RoRE performance
relative to our Water and Sewerage Company (‘WaSC’) peers which is
below 139%, but above 100%, of Severn Trent’s Final Determination (‘FD’),
we believe that achieving UQ against peers within the performance
period would represent exceptional performance and hence justify
full vesting. There will be no change to how threshold and target
performance will be calibrated and there will be nil payout for any
performance below the FD. As a Committee, we will continue to
review formulaic LTIP vesting outcomes to ensure that they are
a fair and accurate reflection of business performance.
As part of the 2021 Policy review, we will introduce a post-cessation
of employment shareholding requirement in line with the 2018 Code.
We will continue to maintain an ongoing and transparent dialogue
with our major shareholders and actively engage with each of them
individually as the formal Policy review commences later in 2020.
Committee changes
Andy Duff retired as a member of the Committee and Chair of the
Board in March 2020, and Christine Hodgson has succeeded him.
I would like to add my thanks to Andy for his invaluable contribution
and leadership over the past nine years, and to welcome Christine
to both the Committee and the Board.
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
2019 AGM shareholder voting
Resolution
Approve Directors’
Remuneration report
Votes
for
Votes
against
Votes
withheld
176,315,760
1,203,205
762,069
(99.32%)
(0.68%)
103
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information REMUNERATION COMMITTEE REPORT
CONTINUED
Key areas of Remuneration Committee focus in 2019/20
A summary of the matters considered at each meeting is set out below:
Our workforce
Executive and senior management remuneration
Committee governance
Approved the outturn of the 2018/19 all-employee
annual bonus scheme.
The Committee discussed and approved the
Company’s approach to achieving alignment of
employer pension contributions between Executive
Directors, the Severn Trent Executive Committee
and the wider workforce by 1 April 2022.
Reviewed and approved the Directors’
Remuneration report 2018/19 and agreed
the framework for the 2019/20 report.
Considered Severn Trent Plc’s 2019 gender
pay gap statistics.
Approved the outturn of the LTIP awards granted
in June 2016.
Reviewed and approved the 2019/20 all-employee
annual bonus scheme structure and targets.
Reviewed and approved the LTIP awards granted
in July 2019.
Considered Severn Trent’s 2018/19 reward
and performance alignment compared with
our WaSC peers.
Considered an independent update, provided
by PwC, on current market practice and future
remuneration trends.
Considered the 2020/21 all-employee annual
bonus scheme structure.
Considered the structure of the LTIP awards
to be granted in 2020.
Reviewed the expenses claim procedure for
the Chair and CEO.
Conducted its annual assessment of the Company’s
workforce policies and practices and satisfied
itself that these support its long-term sustainable
success. The Committee reported to the Board
on this matter.
Considered and endorsed the Company’s intention
to commence the process to become an accredited
real Living Wage employer.
Approved revised Terms of Reference to be
applied from 1 April 2020, prior to making
recommendation to the Board.
COVID-19 impact on executive remuneration
The following table summarises the key components of executive remuneration and the decisions made by the Committee:
Element of
remuneration
2019/20
bonus
Committee decision
Rationale
To pay the bonus in the normal manner with no adjustment.
– The 2019/20 bonus is reflective of the Company’s strong performance in a
At the request of the Executive Directors the full bonus will be
paid in shares, 50% of which will be deferred for three years.
2020/21
salary rises
To increase the level of base salaries for the Executive Directors
in line with the average rise made to all employees.
2020/21
bonus
The CEO and CFO have asked the Company to reduce their salaries
by 25% for the first quarter of our 2020/21 financial year.
The Committee will continue to use the performance conditions
and weightings agreed with shareholders. However, in relation
to Group PBIT the Committee has determined that the maximum
amount of bonus capable of being paid for this element will
be fixed at the target level even if the actual performance
exceeds target. The Committee believes that given the external
circumstances and wider impact of COVID-19 on society it is
not appropriate to pay a bonus greater than target level for
the 2020/21 financial year for PBIT. Therefore, in practice the
maximum achievable bonus potential will be approximately
91%, rather than 120%, of salary.
2017 LTIP
vesting
The Committee intends to allow the 2017 LTIP award to vest
without adjustment in June 2020.
2020 LTIP
grant
The Committee has determined to make the grant on the normal
timetable and to retain the performance conditions and targets
agreed with shareholders.
The Company will follow its normal practice of using the three-day
average share price immediately prior to the date of grant to
determine the number of shares awarded.
challenging year, prior to the impact of COVID-19.
– The Company bonus criteria are the same for executives and all other employees.
– All eligible employees will receive their 2019/20 bonuses.
– The final dividend will be paid.
– The Company’s balance sheet, liquidity and finances are strong.
– The Company has announced its commitment for all eligible employees to
receive a salary increase in the 2020/21 financial year, as part of a three-year
pay deal, as well as a commitment not to furlough or make redundancies as
a result of COVID-19.
– The Company has committed publicly to the operation of a bonus plan for
all eligible employees for 2020/21.
– The Company performance conditions are the same for employees and
Executive Directors.
– Whilst the budget for the year reflects the anticipated impact of COVID-19, the
Company’s five year plan in aggregate remains materially unchanged in terms
of its ambition and performance. Annual bonus targets will, therefore, be set in
the light of financial and other objectives re-phased for the impact of COVID-19.
– The 2017 LTIP measures performance over three years and therefore has
only been marginally impacted by COVID-19.
– The value of the shares on vesting will reflect the share price experience
of our shareholders.
– The LTIP performance condition is based on the long-term RoRE performance
of the Company over AMP7 and therefore remains appropriate.
– The Company’s share price has been less impacted by COVID-19 than many
other companies and is higher today than the price used for the 2019 LTIP grant.
– The Committee will assess the value of the 2020 LTIP award at vesting and will
ensure that the final outturn reflects all relevant factors, including consideration
of any windfall gains.
Who supports the Committee?
To ensure that the Company’s remuneration practices are inline
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. The CEO, Director of Human
Resources and the Head of HR Operations also attend meetings, by
invitation, 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, on a time-spent basis, for advice provided by PwC to the Committee
during the year were £98,643 excluding VAT (2018/19: £143,000). Separate
teams within PwC also provided unrelated tax consulting, pensions, and
other assurance and advisory services during the year. There are no
connections between PwC and individual Directors to be disclosed.
104
Severn Trent Plc Annual Report and Accounts 2020 REMUNERATION
AT A GLANCE
The following section sets out our remuneration framework, a
summary of how the Policy was applied in 2019/20 in the context
of our business performance, and from page 108 details how the
Committee intends to implement the Policy in 2020/21.
Strategic alignment of remuneration
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. The following table sets out how the annual
bonus scheme and LTIP for 2019/20 reflects the strategic framework
which was in place at the start of 2019/20. This will be updated next
year to reflect the 2020/21 annual bonus scheme which will be linked
to our new purpose of taking care of one of life’s essentials.
Further information on the Company’s new Purpose and Values can
be found on page 14.
PERFORMANCE BASED PAY LINKED TO THE STRATEGIC FRAMEWORK IN PLACE IN 2019/20
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 HAVE WE MEASURED PROGRESS AGAINST OUR OBJECTIVES DURING THE YEAR?
INTERNAL SEWER
FLOODING
EXTERNAL SEWER
FLOODING
IMPROVEMENTS TO RIVER
WATER QUALITY
DELIVERING OUR CAPITAL
PROGRAMME
NUMBER OF CATEGORY
3 POLLUTION INCIDENTS
BUILDING A SUSTAINABLE
BUSINESS
CLEAR PR19 PLAN
COMPELLING CASE
FOR INVESTMENT
LOST TIME INCIDENTS PER
100,000 HOURS WORKED
QUEST ENGAGEMENT
MINUTES WITHOUT SUPPLY
SUCCESSFUL CATCHMENT
MANAGEMENT SCHEMES
WATER QUALITY
COMPLAINTS
C-MeX
IMPROVEMENTS
IN LEAKAGE
ENERGY SELF-GENERATION
BE THE SECTOR’S
THOUGHT LEADER
HOW ARE OUR STRATEGIC OBJECTIVES LINKED TO OUR INCENTIVE PLAN?
ANNUAL BONUS SCHEME
CUSTOMER, ASSET HEALTH AND
ENVIRONMENT ODIs (35%)
CUSTOMER, ASSET HEALTH AND
ENVIRONMENT ODIs (35%)
GROUP PBIT
(49%)
CUSTOMER, ASSET HEALTH AND
ENVIRONMENT ODIs (35%)
HEALTH AND SAFETY
(8%)
CUSTOMER
EXPERIENCE (8%)
LTIP BASED ON 100% RoRE AND THE COMPONENTS OF RoRE ARE:
WHOLESALE TOTEX
RETAIL OPERATING COSTS
ODIs
FINANCING
105
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REMUNERATION COMMITTEE REPORT
CONTINUED
2019/20 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 120 in the Annual Report on Remuneration.
CEO (Liv Garfield)
CFO (James Bowling)
Minimum
918
Minimum
559
On-target
Maximum
Single figure
2019/20
Single figure
2018/19
2,252
On-target
1,227
3,946
Maximum
2,058
2,733
2,479
Single figure
2019/20
Single figure
2018/19
1,418
1,286
0
1,000
2,000
3,000
4,000
0
1,000
2,000
3,000
4,000
Salary
Pension
Benefits
Salary
Pension
Benefits
Annual bonus
LTIP
Share price growth
Annual bonus
LTIP
Share price growth
– Minimum pay is fixed pay only (i.e. salary + benefits + pension).
– All amounts have been rounded to the nearest £1,000. Salary levels (which
– 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.
are the base on which other elements of the package are calculated) are based
on the salary paid during the year ended 31 March 2020. The value of taxable
benefits is the cost of providing those benefits in the year ended 31 March 2020.
The Executive Directors are also permitted to participate in the all-employee
Sharesave scheme, on the same terms as other eligible employees, but they
have been excluded from the above graph for simplicity.
Annual bonus 2019/20 outturn
A summary of performance is set out on pages 38 to 50 of the Strategic report.
Bonus element
Group
PBIT(i)
Customer, Asset
Health and
Environment ODIs
Health and
Safety(ii)
Customer
Experience(iii)
Threshold
(0% payable)
£545.0m
Target
(50% payable)
£560.0m
Maximum
(100% payable)
£575.0m
Actual £570.3
Weighting
49%
Outcome
achieved
45.1%
£4.9m
£26.3m
£47.2m
35%
20.0%
0.25
14
Actual 0.20
0.16
11
Actual £35.9
0.09
8
Actual 9
8%
8%
2.2%
6.7%
(i)
If the PBIT component is above target the additional costs are covered by incremental profit. The bonus outturn is based on the equivalent PBIT value before payment of a stretch bonus
which is equal to £572.6m for the Group. After payment of the stretch bonus (£2.3m) the underlying Group PBIT is £570.3m, as defined in note 44 to the Group financial statements.
(ii)
Measured as number of lost time incidents divided by number of hours worked multiplied by 100,000.
(iii) Measured as ranking in C-MeX the new industry-wide performance measure.
Bonus opportunity and outcome
Name of holder
CEO
CFO
2019/20
salary
(£’000)*
Bonus
opportunity
(% salary)
725.0
436.9
120%
120%
Bonus
outcome
(% max)
74.0%
74.0%
Annual
bonus
(£’000)**
643.5
387.8
Value
paid in
shares
(£’000)
321.8
193.9
Value of
deferred
shares
(£’000)
321.7
193.9
*
Bonus calculated using salary at 31 March 2020.
** The CEO and CFO requested that the 2019/20 bonus be paid fully in shares, with 50% deferred for three years.
***
Includes operational/administrative/advisory roles.
106
2019/20
team
manager/
technical
expert
bonus
outturn
(£’000)
2019/20
front line
bonus
outturn
(£’000)***
1.2
1.7
Severn Trent Plc Annual Report and Accounts 2020 2017 LTIP vesting in 2019/20
The chart shows the outcome of the 2017 LTIP
awards, for which the performance period ended
on 31 March 2020. The LTIP which is based on
RoRE over the three years to 31 March 2020 will
vest in June 2020.
Further information is provided on page 122 in
the Annual Report on Remuneration, including
a breakdown of the LTIP awards granted to
Executive Directors in 2019.
2017 LTIP vesting table
RoRE – measured
against multiple
of Ofwat FD
Threshold FD
(25% payable)
1x
Maximum
(100%
payable)
1.39x
CEO outcome
(vesting as
% of award)
CFO outcome
(vesting as
% of award)
100%
100%
Actual 1.51x
Number
of shares
granted
42,383
17,028
Award
vesting
(% max)
100%
100%
Face value
of shares
vesting
(£’000)(i)
1,058.7
425.4
Value
attributable
to share
price
movement
(£’000)
Value of
dividend
equivalents
due
(£’000)(ii)
43.2
17.4
113.0
45.4
Value of
resultant
award
(£’000)
1,171.7
470.8
CEO
CFO
(i) Based on 3 month average share price as at 31 March 2020 of £24.98.
(ii) Based on dividends paid in the period since date of grant to 31 March 2020.
Business performance – 2019/20 outturns against
Key Performance Indicators (‘KPIs’)
The charts show our customer ODI and RoRE performance since the
beginning of AMP6. This strong sustained level of performance,
when compared with our FD, 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.
RoRE %(i) (ii) (iii)
2015/16
2016/17
2017/18
2018/19
2019/20
6.2%
6.5%
10.4%
9.0%
11.1%
10.2%
8.1%
8.2%
6.7%
Severn Trent
UQ of WaSCs
(i) Our calculation of RoRE includes the PR14 SIM measure, whereas the UQ RoRE is
based on published company data which currently does not include the impact of SIM.
(ii) Severn Trent RoRE has been restated for years 2015/16 to 2018/19 to recognise the
impact of the PR14 SIM penalty (-0.1% p.a.) over the years when the penalty was earned.
(iii) Calculated in accordance with Ofwat methodology. UQ data is not yet available for the
current year.
Cumulative ODI £m outperformance
ODI £m outperformance by year
2015/16
23.2
6.7
61.2
70.6
2016/17
18.2
2017/18
34.8
2018/19
46.4
2019/20
23.2
2015/16
6.7
2016/17
11.5
61.2
47.4
271.8
2017/18
16.7
93.6
71.6
117
154.8
142.2
138.1
222.8
222.8
174.0
258.7
330
2018/19
11.6
58.2
80.7
2019/20
35.9
Severn Trent cumulative
Water industry cumulative – including Severn Trent
Severn Trent reward
Water industry reward – including Severn Trent
WaSC average
Severn Trent – value of benefits had the cap not been in place
WaSC average
Severn Trent – value of benefits had the cap not been in place
(i) Customer ODIs quoted pre-tax in 2012/13 prices.
(ii) 2017/18 figure restated to reflect Ofwat’s decision on supply interruptions in their FD of in-period ODIs for 2018.
(iii) 2018/19 figure is post the regulatory customer ODI cap. The grey bar demonstrates the equivalent value of benefits which would have been delivered had the cap not been in place.
(iv) WaSC average and Industry reward not yet available for the current year.
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CONTINUED
Executive Director shareholdings % of base salary
300
CEO
632
632
137
447
200
CFO
324
324
95
336
0
%
salary
200%
400%
600%
800%
1,000%
1,200%
1,400%
Shareholding requirement
Shares counting towards shareholding requirement(i)
Unvested subject to continued employment(ii)
Unvested subject to performance(iii)
(i)
(ii)
Represents beneficially owned shares as well as shares held in trust as part of the annual bonus deferred share
awards (of which 47% are deducted to cover statutory deductions).
Represents 2017 LTIP shares which are subject to an ongoing vesting period plus shares held as part of the
Sharesave scheme.
(iii) Represents the 2018 and 2019 LTIP awards which are subject to ongoing performance.
All calculations in the above chart use a closing share price on 31 March 2020 of £22.80.
2019/20
single figure
(£’000)
Shares held
at the start
of the year
Shares held
at the end
of the year
Value of shares
at start of year
(£’000)
Value of shares
at end of year
(£’000)
CEO
CFO
2,733.4
137,349
180,738
2,714.0
1,418.0
32,075
49,826
633.8
4,120.8
1,136.0
Difference
(£’000)
1,406.8
502.2
(i) Based on a closing share price on 31 March 2019 of £19.76.
(ii) Based on a closing share price on 31 March 2020 of £22.80.
Executive Director shareholdings
The CEO and CFO have exceeded the shareholding
requirements applicable in 2019/20 of 300% and
200% of salary, respectively.
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 five years and then
subsequently maintained.
Further detail regarding the Executive Directors’
outstanding share awards can be found on page 123.
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.
SUMMARY OF THE POLICY AND
IMPLEMENTATION IN 2019/20 AND 2020/21
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 and 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 over five years
Fixed pay
Fixed pay
Year 1
Salary
Benefits,
pension
Year 2
Year 3
Year 4
Year 5
Annual bonus
(Malus and clawback provisions apply)
50% in cash
50% in shares
Three-year deferral period
No further performance conditions
LTIP
(Malus and clawback provisions apply)
Up to 200% of salary
Three-year performance period
Two-year holding period
No further performance conditions
108
Severn Trent Plc Annual Report and Accounts 2020 The table below sets out an overview of the key areas of the Policy and summarises how the Committee applied the Policy in 2019/20,
together with details of how the Committee intends to implement the Policy in 2020/21.
Base salary
To recruit and reward Executive Directors of a suitable calibre for the role and duties required.
Operation
Opportunity
How we implemented
the Policy in 2019/20
How we plan to implement
the Policy in 2020/21
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.
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.
Executive Directors’ salaries
increased by 2.4% from
1 July 2019.
CEO – £725,000
CFO – £436,900
These rises were in line
with the general employee
salary increase of 2.4%.
Executive Directors’
salaries increase by 2.3%
from 1 July 2020.
CEO – £741,700
CFO – £447,000
These rises are in line
with the general employee
salary increase.
The CEO and CFO asked
the Company to reduce their
salaries by 25% for the
first quarter of 2020/21.
Benefits
To provide competitive benefits in the market to enable the recruitment and retention of Executive Directors.
How we implemented
the Policy in 2019/20
Normal company
benefit provision.
How we plan to implement
the Policy in 2020/21
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
travel allowance (formerly car
allowance, changed to recognise
the use of public transport),
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.
How we implemented
the Policy in 2019/20
How we plan to implement
the Policy in 2020/21
Executive Director pension
arrangements for 2019/20
were as follows:
CEO – 25% of salary
CFO – 25% of salary
Executive Director pension
arrangements for 2020/21
are as follows:
CEO – 21.6%
CFO – 21.6%
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 reduced
in stages from a maximum
of 25% of salary to 15% of
salary by 1 April 2022.
For any new recruit, the
contribution will be up
to a maximum of 15%
of salary.
This is in line with the level
of contribution available to
members of the Severn Trent
Group Pension Plan (the majority
of the wider workforce).
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CONTINUED
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
How we implemented
the Policy in 2019/20
How we plan to implement
the Policy in 2020/21
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.
No change to the maximum
bonus opportunity or payment
mechanisms of bonuses.
We will articulate the ODI
measures in language which
brings to life how we work,
as described below.
Performance measures
(as a % of maximum):
Group PBIT – 49%
Customer & Environment
ODIs – 35%
– Minimise disruption to
customers (12%)
– Prevent failure in our
network and our sites (11%)
– Improve the environment
we live in (12%)
Customer Experience – 8%
Health & Safety – 8%
Maximum opportunities:
CEO – 120% of salary
CFO – 120% of salary
Performance measures
(as a % of maximum):
Group PBIT – 49%
Customer, Asset Health and
Environment ODIs – 35%:
– Customer (15%)
– Asset Health (10%)
– Environment (10%)
Customer Experience – 8%
Health & Safety – 8%
Executive Directors awarded
bonuses of:
CEO – 88.8% of salary
CFO – 88.8% of salary
At the request of the Executive
Directors the full amount will
be paid in shares, 50% of which
will be deferred for three years.
See page 106 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.
Operation
Opportunity
How we implemented
the Policy in 2019/20
How we plan to implement
the Policy in 2020/21
Maximum award opportunity
up to 200% of salary. Up to 25%
of an award may vest for
threshold performance.
Grant levels:
CEO – 200% of salary
CFO – 150% of salary
The 2017 LTIP vested in the
year at 100%. See page 122
for further information and
for details of the RoRE target
for the 2019 LTIP awards
granted in the year.
No change to maximum
LTIP opportunities.
See page 103 of the
Committee Chairman’s letter
for clarification of the operation
of the performance targets.
See page 111 for detail on LTIP
awards to be granted.
The Committee will assess the
value of the 2020 LTIP awards at
vesting and will ensure that the
final outturn reflects all relevant
factors, including consideration
of any windfall gains.
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.
110
Severn Trent Plc Annual Report and Accounts 2020
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 2019/20
How we plan to implement
the Policy in 2020/21
No change to requirements.
CEO – 300% of salary
CFO – 200% of salary
See pages 108 and 123 for
further details on shareholding
requirements and outstanding
share awards.
LTIP awards to be granted in 2020
The table below describes how the LTIP will be implemented in 2020. 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 2023, and corresponding vesting
(as % of salary) will be:
Operation
Vesting for performance
Chair and Non-Executive Directors’ fees (audited)
From 1 July 2020, Non-Executive Director fees
will be increased by 2.3% from £56,450 to £57,750,
in line with the general employee salary increase.
Operation
Chair’s fee
Award
2020 LTIP
Threshold FD
% salary
CEO
CFO
37.5%
25%
1.39x FD
% salary
150%
100%
UQ RoRE
performance
relative to
WaSCs
% salary
200%
150%
Fees
2020/21
Fees
2019/20
Increase %
£300,000
£294,600
Fee paid to all Non-Executive Directors
£57,750
£56,450
The Chair, Christine Hodgson, succeeded Andrew
Duff on 1 April 2020, having joined the Board as
a Non-Executive Director on 1 January 2020. The
Chair’s fee changed from £294,600 to £300,000
on 1 April 2020.
Supplementary fees:
– Senior Independent Director
– Audit Committee Chair
– Remuneration Committee Chairman
– Corporate Sustainability Committee Chair
– Treasury Committee Chair
The Chair asked the Company to reduce her
fee by 25% for the first quarter of 2020/21.
The current fee levels, and those for the future
financial year, are set out in the table opposite.
The Chair, 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.
£10,000
£15,000
£15,000
£13,000
£15,000
£10,000
£15,000
£15,000
£13,000
£15,000
1.8%
2.3%
0.0%
0.0%
0.0%
0.0%
0.0%
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COMPANY
REMUNERATION
AT SEVERN TRENT
This new section sets out the steps we take to make
sure that our pay and reward framework is transparent,
beyond executives and senior management, in a way
that is meaningful and useful. Further detail on all
aspects of our employee experience, including ways in
which we communicate with employees, our activities
and our accomplishments in the year, are set out in
the Our People section on page 20.
Pay and alignment across the business
Alongside our thriving culture and inclusive working environment,
our reward framework is designed to attract, motivate and retain
people who are inspired by Severn Trent’s Purpose, and live our
Values every day. Our new Values have been positively received
across the business since they were rolled out in November 2019,
as can be seen on page 20.
Our reward package recognises the great performance of our
employees, as we deliver our essential service to customers across
the region, and is designed to reward all colleagues fairly throughout
the organisation. We do this by providing our employees with the
remuneration elements set out on the next page.
This section of the report covers:
– Pay and alignment across the business;
– Our Remuneration principles;
– What the Remuneration Committee has
looked at in the last 12 months; and
– Pay comparisons
– Alignment with Group performance;
– CEO pay ratios; and
– Gender pay gap reporting.
OUR VALUES
112
Severn Trent Plc Annual Report and Accounts 2020 Eligibility
All employees
Number of
employees covered
Remuneration
element
Details
6,864
(as at
31 March 2020)
Salary
Benefits
Pension
Annual bonus
SAYE
LTIP
A proportion of
this population
participate
in the LTIP by
annual invitation
Shareholding
requirement as
a % of salary
CEO – 300%
CFO – 200%
Exec Co – 100%
Management and
senior management
356
Executive Committee and
Executive Directors
11
Our Supply Chain
Salaries are set to reflect the 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.
44% of our employees choose to tailor their benefits via
our flexible benefits scheme. They have also saved over
£91,000 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). As set out in the Chairman’s letter
on page 103, the employer pension contributions for incumbent
Executive Directors will be aligned with the maximum 15%
contribution available to members of the Severn Trent Group
Pension Plan (the majority of the wider workforce) by 2022.
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 99% of our employees are members of
the pension scheme and 61% 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 £1,151 to our frontline employees
in Severn Trent Water Limited and Hafren Dyfrdwy Cyfyngedig. New
starters, post 6 January 2020, 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 colleagues to share in the
long-term success of the Company whilst also aligning
participants with shareholder interests.
72% 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.
We have achieved real Living Wage employer accreditation
and firmly believe this is an important step to take. It affords
us the opportunity to share our experiences and influence
standards throughout our supply chain. This commitment
and expectation will be built as part of our Sustainable Supply
Chain Charter, alongside modern slavery and social mobility.
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CONTINUED
Remuneration principles
We strongly believe in fair and transparent reward throughout the organisation and when making decisions on executive remuneration the
Committee considers the context of wider workforce remuneration. This section shows how the 2018 Code is embedded in our remuneration
principles and how they are cascaded throughout the organisation. The diagram below shows how the Policy is aligned with the factors set
out in Provision 40, and how our principles and Policy are aligned with the 2018 Code.
OUR PURPOSE: TAKING CARE OF ONE OF LIFE’S ESSENTIALS
HOW DO WE EMBED OUR PURPOSE AND VISION IN OUR REMUNERATION GUIDING PRINCIPLES?
Support our Purpose,
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 and Values
– The Committee
reviews the executive
reward framework
regularly to ensure
it supports the
Company’s strategy
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
Executives 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
Predictability
Proportionality
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.
Shareholders were given full information on the potential values which could be earned under the annual bonus and LTIP
Plans on their approval. In addition, all the checks and balances set out above under ‘Risk’ were disclosed at the time of
shareholder approval.
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 Executives 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.
114
Severn Trent Plc Annual Report and Accounts 2020 What the Remuneration Committee has looked at
in the past 12 months
The Committee carried out its first review, under the 2018 Code, of key
remuneration elements, policies and processes by employee group
during the 2019/20 financial year. This process was introduced for
the Committee to meet its responsibility for the oversight and review
of wider workforce pay and policies, and to ensure they are designed
to support the Company’s desired culture and Values.
The Committee’s process
In November 2019 the Committee reviewed its first report
which set out details of workforce pay policies and practices.
The Committee has always been provided with information on
how the cascade of the reward framework applies across
different levels within the organisation and this information has
in turn been shared with shareholders in this report (see page 113).
This year, and in line with the requirement of the 2018 Code, the
Committee has sought to understand areas of variation within the
Company’s pay policies and practices. The table below sets out a
summary of the information which the Committee received this
year as part of its review process.
Focus areas
Implementation at Severn Trent
– Date of annual increase across
all employee groups;
– Wider workforce increases versus
the senior executive population; and
– Differences across employee groups.
– Salary increases were on average 2.4% across the workforce in 2019/20.
– Annual pay reviews are effective in July for all employee groups.
– The Company has achieved real Living Wage employer accreditation
and reviews salaries in this context.
– Enhanced visibility on salary ranges within the organisation to enable
fairness and transparency.
Element
Salary
Benefits
Pension
– Types of benefits; and
– Eligibility across levels.
– Employer pension contributions
across the workforce; and
– Comparisons of wider workforce
pension to executive pensions.
Annual bonus
– Bonus design across
different populations;
– Details of performance
measures and targets; and
– Outturn during the year.
– A consistent approach is applied across the business for benefits.
– The majority of employees are eligible to participate in the Severn
Trent Group Pension Plan. The maximum workforce employer
contribution is 15%.
– As set out in the Chairman’s letter on page 103, we have started the
process of aligning employer pension contributions for incumbent
Executive Directors with the maximum 15% contribution available
to members of the Severn Trent Group Pension Plan (the majority
of the workforce) and this will be achieved by 2022.
– A consistent design is operated throughout the business.
– At all levels performance outcomes are measured against the same
metrics (see the next page).
– An individual performance multiplier is in place across management
grades informed by our Inspiring Great Performance (‘IGP’) outcomes.
Our front line colleagues and team managers benefit from an all
company fixed bonus payment.
– Bonus opportunities vary by grade.
– We also operate some sub-schemes in Business Services, to reflect
specific business needs.
– Malus and clawback provisions are in place.
Sharesave
– Take-up rates.
– All employees under Severn Trent Plc can participate in the Save
LTIP
– Eligibility;
– Cost;
– Dilution; and
– Details of performance
measures and targets.
As You Earn scheme – Sharesave.
– There is a significant take-up of this benefit with 72% of employees
actively participating.
– Eligibility is reviewed annually.
– The LTIP is available to Executive Directors, the Executive
Committee and some members of senior management.
– The vesting period is three years. The Executive Directors are
subject to an additional two-year holding period for awards
granted from 2018 onwards.
– LTIP opportunities vary by role from 200% of salary to 25% of salary.
– Executive Directors have a UQ performance target.
– Malus and clawback provisions are in place.
Shareholding
requirement
– Eligibility; and
– Requirements and actual shareholdings.
– Shareholding requirements are in place for the Executive Directors
and Executive Committee.
The Committee believes that the context and knowledge shared is a useful underpin to ensure that our future decision-making around
executives’ and senior managements’ pay supports fair and equal remuneration throughout the entire workforce.
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CONTINUED
We operate a consistent core bonus design across the organisation
Employee group
Executive Directors
Executive Committee
Strategic Leader
Business Leader
Team Manager/
Technical Expert
Performance measures in core bonus
PBIT (49%)
CUSTOMER AND ENVIRONMENT ODIs (35%)
CUSTOMER EXPERIENCE (8%)
Front Line – operational/
administrative/advisory
HEALTH AND SAFETY (8%)
The Committee’s key findings and conclusions
Element
Implementation at Severn Trent
Differences in
approaches to
remuneration
The Committee is satisfied that the approach to remuneration within the business across all levels is fair.
An area that the Committee reviewed this year was around new starters and the Committee is satisfied
that within the different employing entities all new starters are treated consistently.
The Committee recognises there are differences in pay practice in some of our recently acquired businesses
(Agrivert and Hafren Dyfrdwy), but that these are necessary and reasonable to align with the terms and
conditions of their employing entity for operational reasons.
As the Company continues to evolve its approach to reporting and sharing information with the Committee,
papers now also include relevant wider workforce information so the Committee can understand where
there may be differences in approach.
Salary increases
Salary increases for employees across the Company are being applied on an equitable basis and average
employee increases are considered when setting salary increases for both the Executive Directors and
Non-Executive Directors.
Variable pay
Variable pay for all employees is linked to the achievement of stretching performance targets and
underpinned by a strong governance framework for all. The measurement of performance is consistent
through the entire workforce using our IGP approach alongside investment in personal development
and rewarded through our all-employee annual bonus scheme.
Remuneration mix
and leverage
The incentive approach applied to the Executive Directors aligns with the wider company policy on incentives,
which is to have a higher percentage of at-risk performance pay and increased amount of incentive deferred,
provided in equity and/or measured over the longer term the more senior the employee.
Alignment with
remuneration
principles
Overall, the Committee is satisfied that the approach to remuneration across the business is aligned with the
Company’s remuneration principles, and the approach to executive remuneration aligns with wider company
pay policy and that there are no anomalies specific to the Executive Directors. Further details on the cascade
of the reward framework can be found on page 113.
We are mindful of the 2018 Code requirement that we engage with employees to explain how our executive remuneration aligns with
wider pay policies. We are looking forward to sharing this year’s Directors’ Remuneration report with members of the Company Forum
and highlighting the availability and accessibility of the Annual Report on the Company intranet (‘On Tap’).
116
Severn Trent Plc Annual Report and Accounts 2020 What will the Remuneration Committee look at in the next 12 months
EMBEDDING OUR
NEW PURPOSE
AND VALUES
EXPLORING
COLLEAGUE
FEEDBACK
ENHANCING
PAY FAIRNESS
POLICY
REVIEW
– We are exploring colleague
feedback and our data
to facilitate a deep dive
into areas of interest
concerning wider
workforce pay reporting,
the cascade of incentives,
policies and practices.
– The Committee will again
review any high-level
changes to wider workforce
policies and practices over
the period.
– We have also committed to
carrying out an assessment
of the Group’s wider
workforce policies and
practices in the context
of the new Purpose and
Values. We have launched
in November 2019.
– We are also looking to further
embed our remuneration
principles by linking them
even more explicitly with
our values of equal pay,
transparency and fairness
through the development
of our own fair pay charter.
This will enable us to assess
the findings of our wider
workforce review against
different lenses to draw
conclusions and facilitate
necessary action planning.
– We will maintain an ongoing,
and transparent dialogue
with our major shareholders
and actively engage with
each of them individually
as the formal Policy review
commences later in 2020.
We have committed our
intention to introduce a post-
cessation of employment
shareholding requirement.
Pay comparisons
Our philosophy of transparent reporting is evident in the information
we display in this section of the report, and this year sees the first
publication of CEO pay ratios on page 118.
Total shareholder return
The chart below shows the value at 31 March 2020 of £100 invested in
Severn Trent Plc at the start of AMP6. The intermediate points show
the value at the intervening financial year ends until the end of AMP6.
Our policy quantum compared with peers
When we set the remuneration for the Executive Directors, one of
the factors the Committee considers is the relevant markets for the
Executive Directors, which we believe is the FTSE51-150, and the size
of the Company compared with these peers. The table below shows
the relative position of target total compensation under the Policy in
comparison with the FTSE51-150.
Relative position of target total compensation
CEO
CFO
Total shareholder return over AMP
160
140
120
100
80
60
40
20
)
£
(
n
r
u
t
e
r
r
e
d
l
o
h
e
r
a
h
s
l
a
t
o
T
Positioning of target total compensation of the Company relative to market benchmarks
0
2015
2016
2017
2018
2019
2020
Bottom quartile
3rd quartile
2nd quartile
Top quartile
Severn Trent Plc TSR
Source: Eikon by Refinitiv
117
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information
COMPANY REMUNERATION AT SEVERN TRENT
CONTINUED
The relationship between the remuneration of the CEO and all employees
The Company’s approach to remuneration is consistent for all employees, as outlined on page 113 and in the current Policy which
can be found on the Severn Trent Plc website.
In the first year of disclosing CEO pay ratios we have chosen to publish two years’ worth of information covering 2018/19 and 2019/20.
The table below shows how the CEO’s single total figure of remuneration compares with the equivalent figures for UK employees
occupying the 25th percentile, median and 75th percentile quartiles.
We have chosen Option A under the Regulations for the calculation, which takes into consideration the full-time equivalent basis
of all UK employees and provides a representative result of employee pay conditions across the Company.
Total pay and benefits for all have been calculated as at 31 March 2020 and 2019 respectively in accordance with the single figure
methodology and is based on full-time equivalent pay and benefits. We have not omitted any pay elements from the calculation.
In summary, there has been a small increase in the CEO pay
ratio between 2019 and 2020. Total pay and benefits for the CEO
and employees have remained fairly consistent year-on-year.
The Committee is satisfied that the individuals identified within
each relevant percentile appropriately reflect the employee pay
profiles at those quartiles, and that the overall picture presented
by the ratios is consistent with our pay, reward and progression
policies. However, over the long term, it is reasonable to expect
there to be a degree of volatility in the CEO pay ratio and this could
be caused by the following:
– Our CEO’s single figure is made up of a higher proportion of
incentive-based pay than that of our employees, in line with
the expectations of our shareholders and the Company’s
remuneration approach. This introduces a higher degree of
variability each year which affects the ratio. It should be noted
that all employees in the Company who meet the service
requirement are eligible to receive a bonus based on the
same broad Company performance conditions. This ensures
all employees share in the success of the Company;
– The value of long-term incentives, which measure performance
over three years, is disclosed in pay in the year of vesting, which
increases the CEO pay in that year, again impacting the ratio for
that year;
– Long-term incentives are provided in shares, and therefore
any increase in share price over the three years, as has been
observed for the 2017 LTIP vesting this year, can magnify the
impact of a long-term incentive award vesting in a year; and
– None of the lower quartile, median and upper quartile employees
identified this year are participants in the LTIP. If the value of the
LTIP is excluded from the CEO total remuneration pay ratio
calculation, the ratios would be as follows:
– To employee at the 25th percentile: 47.7
– To employee at the 50th percentile: 37.1
– To employee at the 75th percentile: 30.4
The ratio is therefore driven by the variable nature of the remuneration
elements of our CEO versus that of our employees, and what is
important to us is that the fluctuations in the ratio are influenced
only by differences in the structure of remuneration, which for the
CEO reflect the weighting towards long-term value creation and
alignment with shareholder interests.
83.5
65.0
53.2
3.4
2020
720.8
2,733.4
27.9
36.4
45.0
32.7
42.1
51.3
CEO pay ratio
Chief Executive Officer
Total single figure (£’000)
Annual bonus payment level achieved
(% of maximum opportunity)
LTIP vesting level achieved
(% of maximum opportunity)
Ratio of CEO’s single total remuneration
figure shown:
– To employee at the 25th percentile
– To employee at the 50th percentile
– To employee at the 75th percentile
Ratio of CEO’s single total remuneration
figure shown to the median Executive
Committee member:
2019
2020
2,478.8
2,733.4
58.5%
74.0%
100%
100%
80.8
61.1
48.8
The table below sets out the base salary and total pay and
benefits details for the CEO and the employees at the 25th,
50th and 75th percentiles.
CEO
Base salary (£’000)
Total pay and benefits (£’000)
Employees
Base salary (£’000)
– Employee at the 25th percentile
– Employee at the 50th percentile
– Employee at the 75th percentile
Total pay and benefits (£’000)
– Employee at the 25th percentile
– Employee at the 50th percentile
– Employee at the 75th percentile
118
Severn Trent Plc Annual Report and Accounts 2020
CEO remuneration vs returns to shareholders
The graph on the right shows the value at 31 March 2020 of £100
invested in Severn Trent Plc on 1 April 2010 compared with the
value of £100 invested in the FTSE100. The FTSE100 was chosen
as the comparator index because the Company is a constituent
of that index. The intermediate points show the value of the
intervening financial year ends.
Total shareholder return and total remuneration
400
350
300
250
200
150
100
50
)
£
(
n
r
u
t
e
r
r
e
d
l
o
h
e
r
a
h
s
l
a
t
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T
3,000
2,500
2,000
1,500
1,000
500
)
0
0
0
’
£
(
n
o
i
t
a
r
e
n
u
m
e
r
l
a
t
o
t
O
E
C
0
2010
2011
2012 2013
2014
2015 2016 2017
2018
2019
2020
0
Severn Trent Plc TSR
FTSE100 index TSR
CEO total remuneration (£’000)
Source: Eikon by Refinitiv
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.
Year ended 31 March
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
CEO
Tony Wray
Tony Wray
Tony Wray
Tony Wray
Liv Garfield
Liv Garfield
Liv Garfield
Liv Garfield
Liv Garfield
Liv Garfield
Total remuneration (£’000)(i)
949.8
1,244.1
1,635.3
1,818.4
2,197.6
2,493.6
2,424.0
2,193.5
2,478.8
2,733.4
Annual bonus (% of maximum)
43.2%
LTIP vesting (% of maximum)
SMP vesting (% of maximum)
0.0%
N/A
48.1%
28.4%
82.4%
78.7%
52.0%
88.2%
75.8%
60.4%
58.5%
74.0%
57.5%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
N/A
78.0%
64.3%
N/A
N/A
N/A
N/A
N/A
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
The Committee looks to ensure that the approach to fair pay is
implemented in practice throughout the Group, and monitors
year-on-year changes between 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. As
required under the Shareholder Rights Directive we have expanded
this analysis to cover each Executive Director and Non-Executive
Director and will build this information to display a five year history.
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 the 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 consistency in the fixed pay of the Executive Directors
and Non-Executive Directors compared with the wider workforce.
In addition, this information demonstrates the Company’s approach
to having an all-employee bonus throughout the organisation with
employees and the CEO benefiting when the Company does well.
Percentage change in remuneration of Executive Directors
and Non-Executive Directors
Executive Directors
Liv Garfield
James Bowling
Non-Executive Directors(iv)
Christine Hodgson(v)
Andy Duff(vi)
Kevin Beeston
John Coghlan(vii)
Dominique Reiniche
Philip Remnant
Angela Strank
Average per employee(viii)
% change on last year for 2019/20
Salary(i)
Benefits(ii)
Bonus(iii)
2.4%
2.4%
N/A
2.4%
2.2%
13.3%
2.4%
1.9%
2.0%
3.7%
0.6%
0.0%
29.5%
29.5%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(19.8%)
21.8%
(i)
The salary figures shown are based on full-time equivalent comparisons.
(ii)
(iii)
The benefits figures include travel allowance and family level private medical insurance
for senior and middle managers.
The figures shown are reflective of any bonus earned during the respective financial year.
Bonuses are paid in the following June.
(iv) Non-Executive Directors do not receive any additional benefits or bonus payments.
(v) Appointed to the Board on 1 January 2020 as a Non-Executive Director and appointed
as Chair on 1 April 2020.
(vi) Retired from the Board on 31 March 2020.
(vii) Received an additional fee of £10,000 in relation to his Hafren Dyfrdwy Chairman responsibilities.
(viii) The average pay increase for the wider workforce during the year was 2.4%.
119
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information
COMPANY REMUNERATION AT SEVERN TRENT
CONTINUED
Gender pay gap reporting
Gender pay gap 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. Gender equality is a big part of our
commitment to all aspects of diversity and inclusion; it is absolutely
central to everything we do, and we know just how much it means
to our own people while also being something we believe will help
us attract the best talent regardless of their backgrounds.
We reported our Gender Pay Gap in November 2019 in line with
statutory requirements. The data was based in figures from
5 April 2019 and showed a median gap of 9.8% (last year: 13.2%)
and a mean gap of 3.6% (last year: 2.8%). The decrease in our
median continues to be primarily driven by more women being
attracted to management and senior management roles, and
the slight increase in our mean gender pay gap reflects small
changes within our executive population.
We are proud to offer an effective and inclusive working environment
and are confident that our continuously evolving culture can make
a difference to the career of all our employees.
The full Gender Pay Gap report can be found on the Severn Trent Plc
website, detailing the methodology and definitions, including case
studies showcasing our flexible workplace policies, approach to
running and supporting internal work experience programmes
and external workshops.
We are looking at our data and internal systems to understand how
we will respond to the requirements of the Government’s ethnicity
pay gap reporting legislation once it comes into force.
Pay quartiles
71.5%
79.4%
78.1%
54.5%
Top
quartile
Upper middle
quartile
Lower middle
quartile
Lower
quartile
28.5%
20.6%
21.9%
45.5%
Difference in hourly pay between men and women
1
2
3
1
4
5
9.8%
3.6%
Mean
Difference in annual bonus pay between men and women
1
2
3
1
4
5
2.5%
-38.8%
Mean
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 15 July 2020.
The information on pages 120 to 123 is audited.
Total single figure of remuneration (audited)
The tables below and on the next page set out the total single
figure of remuneration received by the Executive Directors for
2019/20 (or for performance periods ending in 2019/20 in respect
of long-term incentives) and 2018/19 for comparison, and total fees
received by Non-Executive Directors for 2019/20 and 2018/19.
Where necessary, further explanations of the values provided
are included below. The tables and the explanatory notes have
been audited.
Executive Directors
Liv Garfield
2019/20
2018/19
James Bowling 2019/20
2018/19
Salary
(£’000)(i)
Benefits
(£’000)(ii)
Pension
(£’000)(iii)
Other
(£’000)(iv)
720.8
703.7
434.3
424.0
17.2
17.1
16.5
16.5
180.2
175.9
108.6
106.0
0.0
0.0
0.0
4.5
Fixed pay
and benefits
sub-total
(£’000)
918.2
896.7
559.4
551.0
Annual bonus
(£’000)(v)
LTIP
(£’000)(vi)
Variable
remuneration
sub-total
(£’000)
Total
remuneration
(£’000)
643.5
497.0
387.8
299.5
1,171.7
1,085.1
470.8
435.9
1,815.2
1,582.1
858.6
735.4
2,733.4
2,478.8
1,418.0
1,286.4
(i)
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.
(ii)
Benefits include a travel 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 Executive Directors’ pension provision is currently equal to 25% of salary; details of the future phased reduction to 15% by 1 April 2022 are set out earlier in the report.
No Executive Director accrued benefits under any defined contribution pension plans during the year or has participated in a defined benefits scheme while an Executive Director.
(iv) 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.
The annual bonus is typically 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. This year the Executive Directors requested that the full amount be paid in shares, 50% of which will be deferred for three years. See page 106
for further details of the annual bonus outturn for 2019/20.
The value of the 2017 LTIP is based on the estimated value of shares calculated using the average share price for the period 1 January to 31 March 2020 of £24.98 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.
See page 122 for further details of the 2017 LTIP vesting in 2019/20.
(v)
(vi)
120
Severn Trent Plc Annual Report and Accounts 2020
Relative importance of 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
Dividends
2020
£m
343.9
228.4
2019
£m
309.4
211.9
%
Change
11.2%
7.8%
Total Non-Executive Directors’ fees (audited)
Non-Executive
Directors
Christine
Hodgson(i)
Andy Duff(ii)
Kevin
Beeston
John
Coghlan(iii)
Dominique
Reiniche
Philip
Remnant
Angela
Strank
2019/20
Total
(£'000)
14.1
294.6
Fees
14.1
294.6
66.5
66.5
96.5
96.5
56.4
56.4
71.4
69.5
71.4
69.5
2018/19
Total
(£'000)
0.0
287.6
65.1
85.1
55.1
70.1
68.1
Fees
0.0
287.6
65.1
85.1
55.1
70.1
68.1
(i)
Appointed to the Board on 1 January 2020 as a Non-Executive Director and
appointed as Chair on 1 April 2020.
(ii) Retired from the Board on 31 March 2020.
(iii) Received an additional fee of £10,000 in relation to his Hafren Dyfrdwy
Chairman responsibilities.
Benefits for 2019/20 (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 are reviewed periodically. In line with the Policy outlined on page 109, we show below the benefits received by the individual Executive
Directors in the year, and their typical annual value where possible.
Benefits for 2019/20 (audited)
Travel allowance
Private medical insurance
Life assurance
Personal accident cover
Biennial health screening
Incapacity benefits(i)
Typical annual value 2019/20
Typical annual value 2018/19
£15,000
£1,447
Up to 6x
salary
£15,000
£1,500
Up to 6x
salary
As per the Group-wide policy
As per the Group-wide policy
£581 per
health screen
£581 per
health screen
Worth 75% of salary for a
period of five years (subject
to qualifying criteria)
Worth 75% of salary for a
period of five years (subject
to qualifying criteria)
Percentage
increase/
(decrease)
0%
(3.5)%
0%
0%
0%
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.
121
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information COMPANY REMUNERATION AT SEVERN TRENT
CONTINUED
Annual bonus outturn for 2019/20 (audited)
Our all-employee annual bonus scheme ensures that all of our people,
from Executive Directors to our front line employees, are aligned with
the same measures and rewarded appropriately for achieving key
objectives. 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 and
our front line employees, is set out in the At a Glance section on page 106.
LTIP awards vesting in relation to performance in 2019/20 (audited)
The table below shows the outcome in respect of the 2017 LTIP awards,
granted on 20 June 2017, which had performance periods ended
31 March 2020 and indicates the resulting number of shares vesting
and their value. The LTIP based on RoRE over the three years to
31 March 2020 will vest at 100%. This is representative of continued
strong performance in customer ODIs, financing and Totex. Detail on the
performance outcome is given in the At a Glance section on page 107.
Executive
CEO
CFO
Number of
shares
granted
Value of
award at
grant
(£’000)
End of
performance
period
42,383
1,015.5
31/03/20
17,028
408.0
31/03/20
% award
vesting
100%
100%
Number of
shares
vesting
Vesting
date
Value
attributable
to share price
movement
(£’000)
Value of LTIP
shares
vesting(i)
(£’000)
Value of
dividend
equivalents
due on
vesting
shares(ii)
(£’000)
42,383
20/06/20
17,028
20/06/20
43.2
17.4
1,058.7
425.4
113.0
45.4
Total value
of LTIP
(single
figure)
(£’000)
1,171.7
470.8
The 2017 LTIP is the last award where the RoRE calculation will differ slightly from that used in the Annual Performance Report, which
uses the Ofwat definition. The LTIP measure seeks to align 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.
All LTIP awards granted from 2018 onwards use the Ofwat definition of RoRE.
(i) Based on the average share price over the final three months of the performance period of £24.98 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 2020.
Payments for loss of office (audited)
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, 20 June 2020. She will also receive dividend
equivalents on the vested shares.
Award
End of performance period
2017 LTIP
31 March 2020
2019 LTIP award (awards granted during the year)
Award
2019 LTIP
Grant date
23/07/19
Threshold
vesting FD
(baseline)
5.55%
1.39x FD
Equal to
7.71%
Full vesting
(out
performance)
UQ RoRE
compared to
WaSCs
Deferred shares under the annual bonus scheme (including awards granted during the year)
Number of
shares
5,895
3 day average
share price
used for grant
calculations
£20.40
3 day average
share price
used for grant
calculations
Relating to FY
Grant date
2018/19
18/06/19
£20.44
Award
2019 Annual bonus scheme
122
Severn Trent Plc Annual Report and Accounts 2020 Directors’ shareholdings and summary of outstanding
share interests (audited)
Page 108 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 remained
unchanged in 2019/20.
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 19 May 2020.
Directors
Executive Directors:
Liv Garfield
James Bowling
Non-Executive Directors:
Christine Hodgson(v)
Andy Duff(vi)
Kevin Beeston
John Coghlan
Dominique Reiniche
Philip Remnant
Angela Strank
Interests in shares as at 31 March 2020
Beneficially
owned
LTIP
shares(i) (ii)
Annual bonus
shares(iii)
SAYE
options
Shareholding
requirement
as a % of salary
Current
shareholding as
a % of salary
% shareholding
requirement
achieved(iv)
180,738
184,674
49,826
81,336
38,403
23,091
1,089
1,221
300%
200%
632%
324%
210%
161%
2,020
8,184
2,244
2,670
400
1,969
459
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(i) LTIP awards are conditional share awards subject to ongoing performance conditions.
(ii) Additional dividend equivalent shares may be released where provided in the rules.
(iii) Annual bonus shares are deferred shares which are not subject to further performance conditions.
(iv) The share price used to calculate the percentage of the shareholding guideline achieved was £22.80 (as at 31 March 2020).
The guideline figures include unvested annual bonus shares (47% deducted to cover statutory deductions).
(v) Appointed to the Board on 1 January 2020 as a Non-Executive Director and appointed as Chair on 1 April 2020.
(vi) Retired from the Board on 31 March 2020.
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 2020, she was paid fees of £13,700 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.
Service contracts for Executive Directors
Name
Liv Garfield
James Bowling
Date of service contract
Nature of contract
Notice period
Termination payments
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
19 May 2020
123
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information
DIRECTORS’ REPORT
T
R
O
P
E
R
’
S
R
O
T
C
E
R
I
D
The Directors’ report for the year ended 31 March 2020 comprises
pages 124 to 128 of this report, together with the sections of the
Annual Report incorporated by reference. The Governance report
set out on pages 69 to 129 is incorporated by reference into
this report and, accordingly, should be read as part of this report.
As permitted by legislation, some of the matters required to be
included in the Directors’ report have instead been included in
the Strategic report on pages 1 to 68, as the Board considers
them to be of strategic importance.
Specifically, these are:
– Performance Review which provides detailed information relating
to the Group, its business model and strategy, operation of its
businesses, future developments and the results and financial
position for the year ended 31 March 2020;
– Future business developments (throughout the Strategic 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 58 to 62;
– Employee Engagement (page 20); and
– Business relationships (throughout the Strategic report).
The Strategic report and the Directors’ report together form the
Management Report for the purposes of the Disclosure Guidance
and Transparency Rules (DTR) 4.1.8R. Information relating to
financial instruments can be found on pages 176 to 185 and is
incorporated by reference.
For information on our approach to social, environmental and
ethical matters, please refer to our Sustainability Report, available
at severntrent.co.uk.
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 2020 are shown in notes 20 and 45 to the Group
financial statements.
Areas of operation
During the course of 2019/20, 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 72 to 73.
As set out in the Notice of Meeting, all the Directors, with the exception
of Andrew Duff, who retired from the Board on 31 March 2020, will retire
at this year’s Annual General Meeting (‘AGM’) and submit themselves
for reappointment, or in the case of Christine Hodgson and Sharmila
Nebhrajani, appointment, by shareholders. All Directors seeking
reappointment were subject to a formal and rigorous performance
evaluation, further details of which can be found on page 83.
Details of Directors’ service contracts are set out in the Directors’
Remuneration report on page 123. The interests of the Directors in
the shares of the Company are also shown on page 123 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.
Disclosures Required
under Listing Rule 9.8.4R
The information required to
be disclosed in accordance
with Listing Rule 9.8.4R of the
Financial Conduct Authority’s
Listing Rules can be located
in the following pages of this
Annual Report and Accounts:
124
Section
Information to be included
(1)
(4)
A statement of the amount of interest capitalised
Details of long-term incentive schemes
(2), (5), (6), (7),
(8)–(14)
Not applicable
Location
155
110
Not
applicable
Severn Trent Plc Annual Report and Accounts 2020
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 do not 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 there were 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 20 and 88.
Employee engagement
Due to our commitment to transparent and best practice reporting,
we have included our section on employee engagement on page 20
of the Strategic report as the Board considers these disclosures
to be of strategic importance and is therefore incorporated into the
Directors’ report by cross-reference. Pages 28 to 29 demonstrate
how the Directors have engaged with employees and how they have
had regard to employee interests and the effect of that regard including
the principal decisions by the Company during the financial year.
The Company is also 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.
72% of Severn Trent’s UK employees now participate in Sharesave,
with 24.5% of participants saving the maximum of £500 per month
compared with 9.9% across FTSE100 companies.
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.
Business relationships
Pages 28 and 29 demonstrate how the Directors have had regard
to key stakeholders and how the effect of that regard had influenced
the principal decisions taken by the Company during the financial
year. The Board considers its s.172 statement to be of strategic
importance and is therefore incorporated into the Directors’ report
by cross-reference.
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 for the year totalled
£2.1 million, included within 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 96.
Treasury management
Details on our Treasury Policy and management are set out
in the Chief Financial Officer’s review on page 56.
Post balance sheet events
Details of post balance sheet events are set out in note 42
to the Group financial statements.
Dividends
An interim dividend of 40.03 pence per Ordinary Share was paid
on 3 January 2020. The Directors recommend a final dividend of
60.05 pence per Ordinary Share to be paid on 17 July 2020 to
shareholders on the register on 12 June 2020. This would bring
the total dividend for 2019/20 to 100.08 pence per Ordinary Share
(2018/19: 93.37 pence). The payment of the final dividend is subject
to shareholder approval at the AGM.
Dividend Policy
Following publication of the Final Determination by Ofwat, the Board
approved our Dividend Policy for the period 2020-25. With effect from
2020/21, dividends during the AMP7 period will increase by growth of
at least CPIH. This replaces the previous Dividend Policy of growth
of at least RPI +4% each year.
The Dividend Policy reflects our strong operational delivery and financial
performance, along with the Final Determination and ensuring that
our bills are affordable for all of 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 30 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 or 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 2018 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,
125
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CONTINUED
Substantial Shareholdings
As at 31 March 2020, the Company had been notified in accordance with Chapter 5 of the Disclosure Guidance and Transparency Rules of the
following major shareholdings:
Name of Holder
BlackRock
RREEF Real Estate
Qatar Investment Authority
Lazard Asset Management
Legal & General Investment Management
Vanguard Group
SSGA
Pictet Asset Management
Aviva Investors
Number of
Ordinary
Shares
Voting Rights
Held (%)
19,797,394
12,711,225
11,599,565
9,811,549
9,659,132
9,636,352
8,282,897
8,116,317
7,932,977
8.20
5.26
4.80
4.06
4.00
3.99
3.43
3.36
3.28
As at 19 May 2020, the Company had been notified of the following holdings of voting rights in the Ordinary Share capital of the Company:
BlackRock 19,637,348 shares (8.25%), Qatar Investment Authority 11,599,565 (4.87%), RREEF Real Estate 10,246,275 (4.31%), Lazard Asset
Management 9,772,147 (4.11%), Legal & General Investment Management 9,398,792 (3.95%), Vanguard Group 9,730,687 (4.09%), SSGA
8,137,263 (3.43%), Pictet Asset Management 8,206,436 (3.45%), Aviva Investors 7,918,036 (3.33%).
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.
which can be found on our website, the Articles and the Governance
report on page 76.
Under the Articles, the Directors have authority to allot Ordinary
Shares, subject to the aggregate nominal amount limit set at
the 2019 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.
Authority to purchase shares
The Company was given authority at its AGM in 2019 to make
market purchases of Ordinary Shares up to a maximum number
of 23,757,108 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 23,834,985 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
£18,445 (2019: £65,936). 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. You can read
more about the work of our Community Fund on page 40.
126
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.
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.
For the payment practices reporting period ended 31 March 2020,
the average time to pay for Severn Trent Water Limited was 29 days.
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.
External Auditor
Having carried out a review of its effectiveness during the year, details
of which can be found in the Audit Committee report on page 93, 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 its willingness to
continue as Auditor. The Audit Committee will also be responsible for
determining the audit fee on behalf of the Board.
Severn Trent Plc Annual Report and Accounts 2020 We reduce our carbon footprint
We play a leading role in reducing our greenhouse gas emissions.
We have committed to achieving net zero operational carbon
emissions by 2030, building on our long track record of making
year-on-year reductions in our emissions. We have now also
made commitments to generate or procure 100% renewable
electricity and move our fleet to 100% electric vehicles by 20301.
We have also now committed to setting targets under the stringent
‘Science-Based’ methodology.
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 held the Carbon Trust Standard continuously since 2009,
which recognises our consistent emissions reductions and effective
carbon management processes. We continue to report to the Carbon
Disclosure Project (‘CDP’) each year which means our climate
change information is publicly accessible. CDP requests information
about climate change from companies on behalf of investors and
scores each company on the quality and completeness of their
responses. In 2019/20 our CDP score was B, an improvement
from C in 2018/19.
This year, we again reduced our operational emissions, primarily
through the decarbonising effect of increased renewable energy
generation across Severn Trent and our import portfolio. We beat
our 2030 renewable energy target by generating an equivalent of
51% of Severn Trent Water Limited’s electricity needs. This was
up from 43% in 2018/19.
To reduce our operational emissions further we will continue to
focus on improving our energy efficiency to offset the additional
demands of a growing population and more stringent treatment
quality requirements and increase the amount of renewable-backed
energy we buy. We will also continue to decarbonise our fleet
and encourage employees to take up low-carbon electric cars.
Severn Trent Net Carbon Footprint kt CO2e
14/15
15/16
16/17
17/18
18/19
19/20
451
426
390
368
268
260
260 ktCO2e (-3%)
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.
As we have successfully reduced our Scope 2 emissions, we
are now focusing more on our Scope 1 emissions, which are
not as clearly aligned with financial incentives and will require
more innovation to solve.
Report on greenhouse gas emissions
This is the seventh year Severn Trent has been required to report
greenhouse gas (‘GHG’) emissions in the Directors’ report. For
Severn Trent Water, which accounts for 90% of our total Group
emissions, we have been publicly reporting on our emissions since
2002. This year, in line with new environmental reporting guidelines,
we have also included additional energy data and more detail on
how we manage energy use.
Our GHG emissions are reported in tonnes of carbon dioxide
equivalent (tCO2e), for the period 1 April 2019 to 31 March 2020.
Our total net emissions have fallen again this year, due to increased
generation of renewable energy and a reduction in the emissions
intensity of UK grid electricity, including from accredited renewable
energy sources procured in our contract supply. We have reported
this market-based benefit separately in the table below.
Severn Trent Carbon Footprint kt CO2e
Our gross emissions total in the table below applies the ‘location-based’ accounting methodology for grid emissions, which is consistent
with previous years. We also show 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.
Operational Greenhouse Gas Emissions
(Tonnes CO2e)
Scope 1 Emissions (Combustion
of fuel and operation of facilities)
Scope 2 Emissions
(Electricity purchased for own use)
– Location-Based
Total Annual Gross
Operational Emissions
Emissions benefit of the renewable
energy we export (including biogas for
which we hold green gas certificates)
Market-based carbon accounting
benefit from supply of electricity import
which is REGO-backed renewable
Total Annual Net Operational
Emissions – Market-Based
2013/14
2014/15
2015/16
2016/17
2017/18
2018/19
2019/20
132,535
132,406
134,584
138,131
134,307
132,360
156,014
330,679
357,756
337,028
294,426
279,393
217,726
199,635
463,214
490,163
471,612
432,557
413,700
350,086
355,649
21,672
38,878
45,085
42,069
45,333
46,986
59,878
441,542
451,285
426,527
390,488
368,367
268,283
259,987
34,818
35,784
Annual GHG Intensity Ratio (t CO2/unit)
2013/14
2014/15
2015/16
2016/17
2017/18
2018/19
2019/20
Net Operational GHG emissions
of Severn Trent per £m turnover
248.6
255.2
234.7
214.0
217.4
151.8
141.0
1 Where specialist vehicles such as tankers are available within that time window.
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DIRECTORS’ REPORT
CONTINUED
We reduce our carbon footprint (continued)
Our GHG data is reported internally during the year to the Corporate
Sustainability 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. 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. We do report
these indirect ‘Scope 3’ emissions in our CDP Disclosure and we
will report on these in our Annual Report in future years.
For the appointed UK water businesses, Severn Trent Water Limited
and Hafren Dyfrdwy Cyfyngedig, we have calculated our emissions
using the updated ‘Carbon accounting in the UK Water Industry:
methodology for estimating operational emissions, Version 13’
(released April 2020). 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. All emissions arise in the UK.
Energy efficiency
We continually invest in improving energy efficiency and we have a
dedicated energy management team focused on driving operational
change to reduce energy. This is supported by a network of energy
champions across our business and a governance structure which
includes an energy steering group at Executive level.
Over the course of the last year we have invested £4.2 million
in energy efficiency and £20.3 million over the last five years.
These capital schemes include proactive maintenance on our
most energy-intensive assets such as pumps and air blowers and
investment in improved controls to reduce energy use. We use
our half hourly meter data, regular internal communication and
performance reporting to understand energy efficiency and drive
behaviour, minimise waste and identify opportunities. We have
energy online learning for all staff, and specific energy training, for
example on pump efficiency, for specific staff. We are transitioning
our fleet from fossil fuels to electric vehicles and have our first
vehicles on the fleet, along with dedicated site charging points.
We are also rationalising our office sites and moving our data
centre to more efficient alternatives to reduce our total footprint
on digital and office activities.
Severn Trent Energy Data GWh
In line with the latest Government energy and carbon reporting requirements, below is further information on our energy consumption for
the last two years across the Severn Trent Group. This is source data for the carbon data reported above and is tracked internally each month.
All data is collected from metered data for electricity. Biogas combustion information is calculated using assumptions based on metered data.
Fuel use is reported based on financial records of fuel purchased. We have applied assumptions on standard calorific values to convert all
liquid and gas fuel types to a common energy metric (GWh) and data is reported for the period 1 April 2019 to 31 March 2020. All energy is
used in the UK.
Energy type
Source
Electricity
Gas Fuels
Liquid Fuels
Total
Normalised
Metrics
Electricity Imported
Electricity Generated from Renewable Sources and Used on Site
Electricity Generated from Renewable Sources and Exported
Gas Imported from the Grid
Biogas Generated and Used
Biomethane Generated and Exported to the Grid
Fuel used by Plant (gas oil and diesel)
Fuel used by Company Fleet
Fuel used for Business Travel (company cars)
Fuel used for Business Travel (personal cars)
Total Energy Used (i.e. Annual quantity of energy consumed from activities for which
the Company is responsible, including combustion of fuel and operation of facilities)
Total Energy Imported (i.e. Annual quantity of energy consumed resulting from the
purchase of electricity and gas. No imports of heat, steam or cooling)
Total Energy per unit of revenue
Energy Imported per unit of revenue
Clean Water Electricity Use per unit treated
Units1
GWh
GWh
GWh
GWh
GWh
GWh
GWh
GWh
GWh
GWh
GWh
GWh
GWh/£m
GWh/£m
kWh/Ml
1
1 GWh = 1,000,000 kWh.
2019
771
198
114
52
745
166
20
47
15
7
2020
780
194
184
44
922
181
20
55
15
6
1,855
2,037
912
1.05
0.52
705
921
1.11
0.50
690
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 will be made available in due course on
the respective websites.
Additionally, separate Annual Reports for each of Severn Trent
Water Limited and Hafren Dyfrdwy Cyfyngedig will also be available
on their respective websites.
128
Annual General Meeting
A copy of the Notice of Meeting can be found on the Severn Trent Plc website.
By order of the Board
Bronagh Kennedy
Group General Counsel and Company Secretary
19 May 2020
Severn Trent Plc Annual Report and Accounts 2020
DIRECTORS’ RESPONSIBILITY STATEMENT
Each of the Directors confirm that to the best of their knowledge:
– the financial statements, prepared in accordance with the relevant
financial reporting framework, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the Company
and the undertakings included in the consolidation taken as a whole;
– 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 19 May 2020 and is signed on its behalf by:
By order of the Board
Olivia Garfield
Chief Executive
19 May 2020
James Bowling
Chief Financial Officer
19 May 2020
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:
– 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.
129
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TO THE MEMBERS OF SEVERN TRENT PLC
Report on the audit of the financial statements
1.
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 2020 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 (‘IFRS’)
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 statements 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 45 and the related notes to the parent company financial statements 1 to 19.
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).
2. 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 ‘FRC’s’) 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.
3.
SUMMARY OF OUR AUDIT APPROACH
The timing of the Group’s year end, relative to the COVID-19 pandemic related UK lockdown, means the impact of
the pandemic on the principal trading businesses in the Group was not significant in the financial year being audited.
COVID-19 has however increased the level of risk and volatility as at the year end of certain markets to which
Severn Trent Plc is exposed. This includes property markets, in which the Group’s pension scheme is partially
invested and the non-household retail water market that the Group’s joint venture trades in.
As a result, two new key audit matters were identified for the year ended 31 March 2020:
– the valuation of the Group’s assets held to fund retirement benefit obligations – specifically with reference to
the property assets; and
– accounting for the joint venture investment.
The key audit matters that we identified in the current year were:
– valuation of the provision for household trade receivables in Severn Trent Water Limited;
– valuation of the Group’s retirement benefit obligation – liabilities;
– valuation of the Group’s retirement benefit obligation – pension assets;
– classification and valuation of capital expenditure in Severn Trent Water Limited; and
– accounting for the joint venture investment.
Within this report, key audit matters are identified as follows:
– Newly identified
!
– Increased level of risk
– Similar level of risk
– Decreased level of risk
The materiality that we used for the Group financial statements was £16.4 million which was determined on the basis
of profit before tax adjusted for gains/losses on financial instruments.
Our scoping has resulted in over 95% of the Group's net operating assets and 95% of profit before tax adjusted for gains/
losses on financial instruments being subject to audit testing.
Significant
changes in
our approach
Key audit
matters
Materiality
Scoping
130
Severn Trent Plc Annual Report and Accounts 2020 4.
CONCLUSIONS RELATING TO GOING CONCERN, PRINCIPAL RISKS AND VIABILITY STATEMENT
4.1. Going concern
We have reviewed the Directors’ statement in note 2 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 Company’s ability to continue to do so
over a period of at least twelve 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 the COVID-19 pandemic and 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.
4.2. 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 57 to 64 that describe the principal risks, procedures to identify emerging
risks, and an explanation of how these are being managed or mitigated;
– the Directors’ confirmation on page 57 that they have carried out a robust assessment of the principal
and emerging risks facing the Group, including those that would threaten its business model, future
performance, solvency or liquidity; or
– the Directors’ explanation on pages 66 and 67 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.
Going concern is the basis of
preparation of the financial
statements that assumes
an entity will remain in
operation for a period of at
least 12 months from the
date of approval of the
financial statements.
We confirm that we have
nothing material to report,
add or draw attention to in
respect of these matters.
Viability means the ability of
the Group to continue over
the time horizon considered
appropriate by the Directors.
We confirm that we have
nothing material to report,
add or draw attention to in
respect of these matters.
5. KEY AUDIT MATTERS
Key audit matters are those matters that, in our professional judgement, 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.
As noted in section 3, two additional key audit matters have been identified this year.
5.1. Valuation of the provision for household 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 related receivables. Management makes estimates regarding the expected future loss rate for current
receivables when calculating the appropriate level of bad debt provision.
The bad debt provision recorded for household trade receivables in Severn Trent Water Limited as at 31 March 2020 was
£134.3 million (31 March 2019: £115.3 million), which includes an additional £2.1 million to reflect management’s estimate
of the impact of COVID-19 on customers’ ability to pay their outstanding bills to Severn Trent Water Limited.
Provisions are made against Severn Trent Water Limited’s trade receivables based on historical cash collection rates of
debt invoiced seven to nine years ago, which is considered by management to be representative of collection risk on the
whole population of household debtors. A top-up to the provision has been recorded to reflect anticipated changes to cash
collection as a result of COVID-19.
The key audit matter, which is also a potential fraud risk, has been focused on the valuation of the household bad debt
provision, and specifically whether the experience of debt invoiced seven to nine years ago provides an appropriate
expectation of future credit losses under IFRS 9 Financial Instruments.
The Audit Committee also considered this as a significant issue as discussed in the Audit Committee Report on page 95.
The bad debt provision is discussed in note 2(p) and note 22 to the financial statements.
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CONTINUED
How the scope
of our audit
responded
to the key
audit matter
Our procedures included the following:
– Obtaining an understanding of relevant management review controls over the bad debt provision model;
– Testing the completeness and accuracy of data used in the bad debt model;
– Reviewing management’s assumptions applied to the bad debt provision and challenging whether they reflect the
lifetime expected credit outcomes for receivables, including reviewing of cash collection data and historical trends;
– Reviewing management’s assumptions applied to the COVID-19 manual overlay and challenging the reasonableness
of economic forecast data within the calculation by comparing against independent economic forecasts;
– Testing the allocation of cash received in the current year against debt aged between seven and nine years; and
– Reconciling the debtor ageing for each debt category to source data.
Key
observations
We are satisfied that the bad debt provision has been properly calculated using appropriate relevant data and in accordance
with IFRS 9.
5.2. Valuation of the Group’s retirement benefit obligation – liabilities
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, and the longevity of pension scheme members in order to determine the value of the
scheme’s liabilities.
This 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, inflation rate and mortality
assumptions (updated during the year for the latest triennial funding valuations), and the related volatility of those
assumptions during the COVID-19 pandemic.
The Group’s retirement benefit obligation (gross liability) as at 31 March 2020 is £2,648.1 million (31 March 2019: £2,871.8 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 95.
Management has included this as a key source of estimation uncertainty in note 4b to the financial statements.
Our procedures included the following:
– Obtaining an understanding of management’s controls over the appropriateness of the assumptions;
– Challenging the discount rate and inflation rate assumptions used in the calculation of the pension scheme deficit as
detailed in note 28, with the support of pension specialists within our audit team, including whether the assumptions
reflect the increased degree of volatility in current COVID-19 circumstances;
– Challenging the mortality assumptions from the latest triennial funding valuations used in the calculation of the pension
scheme deficit as detailed in note 28; and
– Assessing whether there have been any changes in the methodology to determine the assumptions since the prior year;
and if any changes in methodology exists, challenging the appropriateness of the revised methodology.
How the scope
of our audit
responded to
the key audit
matter
Key
observations
We are satisfied that the assumptions used by management in the valuation of the retirement benefit obligation are derived
based on a consistent methodology with those applied in prior years and are appropriate.
5.3. Valuation of the Group’s retirement benefit obligation – pension assets
!
Key audit
matter
description
How the scope
of our audit
responded
to the key
audit matter
The net retirement benefit obligation includes assets totalling £2,414.1 million of which £261.9 million (10.8%) are property assets.
Consistent with guidance provided by the Royal Institute of Chartered Surveyors, the external valuers’ reports to the
investment managers, which management uses to estimate the fair value of the assets in the Group’s balance sheet,
have reported a ‘material valuation uncertainty’ in their valuation reports for property assets. This uncertainty clause
is based on COVID-19 bringing an increased level of risk in and volatility to certain markets as at 31 March 2020.
Given the range of estimation uncertainty, we identified a key audit matter associated with the valuation of the property assets.
The Audit Committee also considered this as a significant issue as discussed in the Audit Committee Report on page 95.
The pension assets, including the property assets, are discussed in note 28 to the financial statements.
Our procedures included the following:
– Obtaining an understanding of management’s key controls over the valuation of pension scheme assets;
– Obtaining from the investment managers for the property funds, the specific details of the material uncertainty
clause in the valuers’ reports;
– Reviewing a summary of the assets in the funds, analysed by sector and also by length of unexpired leases;
– Reviewing a summary of each fund, analysed by sector; and
– Consulting with our Real Estate specialists in order to assess and conclude on the risks of misstatement.
Key
observations
We are satisfied that the valuations of the property assets within the retirement benefit pension asset funds are reasonable
as at 31 March 2020.
132
Severn Trent Plc Annual Report and Accounts 2020 5.4. 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.
During the year Severn Trent Water Limited has invested £830 million (2019: £783 million) in capital expenditure projects
out of the total Group additions of £956.0 million (2019: £861.4 million) disclosed in note 18. Severn Trent Water Limited
spent a further £144.5 million (2019: £137.3 million) on Infrastructure maintenance expenditure (total Group £149.6 million
(2019: £141.6 million)) as disclosed in note 7.
As the classification of capital expenditure, operating expenditure and infrastructure maintenance 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 changes to the Group’s capital expenditure policy implementation guidance or by incorrect
application of this guidance. Due to the level of judgement 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 95.
Management has included this as a critical accounting judgement in note 4a to the financial statements.
We performed the following procedures to respond to this key audit matter:
– Reviewing 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;
– Obtaining an understanding of, and testing, relevant controls over the application of the policy to expenditure incurred
on projects within the Group’s capital programme during the year;
– Testing whether there have been any changes in the application of the policy; and
– For a sample of capital projects, assessing the application of the capitalisation policy to the costs incurred by reviewing
the business cases and invoices.
We are satisfied that the classification and valuation of assets capitalised in the year is appropriate.
How the scope
of our audit
responded
to the key
audit matter
Key
observations
5.5 Accounting for the joint venture investment
!
Key audit
matter
description
During the year ended 31 March 2020, the Group recognised £46.8 million as its share of losses, as an exceptional item, from
its investment in a joint venture (Water Plus) which is a continuing operation. This reduced its investment in joint ventures to nil.
In assessing recognition of its share of losses, management concluded that loans of £9.8 million provided via subordinated
debt instruments represented long-term investments and therefore formed part of the carrying value of its investment
in Water Plus. The carrying value of these loans were also reduced to nil as a result of the above losses.
How the scope
of our audit
responded
to the key
audit matter
The Group has further loans receivable from Water Plus of £92.6 million (2019: £142.0 million) following repayments
in the period of £35.6 million.
Management identified the classification of loans to Water Plus (for the purpose of determining the carrying value of the
long-term investment in the joint venture) to be a critical accounting judgement as disclosed in note 4a to the financial
statements and interests in joint ventures is detailed in note 20 to the financial statements. The Audit Committee also
considered this a significant issue as discussed in the Audit Committee Report on page 95.
Given the materiality of the sums involved, the nature of the critical accounting judgement and the decision by management
to present these losses as exceptional items, we determined that the accounting for and presentation of the Group’s share
of these exceptional losses represented a key audit matter.
In response to the judgement over whether the loans receivable should be classified as part of the long-term investment
in Water Plus, our work included:
– Reviewing the loan agreements and assessing whether they met the criteria of a long-term investment.
In testing whether the loss reported by Water Plus should be recognised as an exceptional loss, we performed
the following procedures:
– Reading the Group’s accounting policy for exceptional items as disclosed in note 2d to the financial statements,
along with the guidance issued by ESMA specific to the application of the APM guidelines in the context of COVID-19;
– Agreeing the share of loss to the Water Plus results for the year and assessing its quantum relative to materiality
and the historical trading performance of Water Plus;
– Assessing and challenging the items underpinning the loss recognised to determine whether they are non-recurring
in nature by making enquiries of Water Plus management; and
– Performing sensitivity analysis on key assumptions that would either individually or collectively impact the share
of loss recognised whilst considering the likelihood of such movements.
Key
observations
We are satisfied that the accounting judgements applied are appropriate and in accordance with the relevant standards
and that the presentation of this matter complies with the Group’s policy for exceptional items.
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CONTINUED
6. OUR APPLICATION OF MATERIALITY
6.1. 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 judgement, we determined materiality for the financial statements as a whole as follows:
Group financial statements
Materiality
£16.4 million (2019: £18 million)
Parent company financial statements
£15.1 million (2019: £16.2 million)
Basis for
determining
materiality
Approximately 5% of profit before tax and gains/losses
on derivative financial instruments.
3.0% of net assets (2019: 3.0%) capped at 95%
of Group materiality.
Rationale for
the benchmark
applied
In the year ended 31 March 2019, our benchmark was profit
before tax, adjusted for gains/losses on financial instruments
and exceptional items; our determined materiality was
approximately 4.8% of this benchmark.
The parent company does not trade or exist for
profit generating purposes so materiality has
been determined using net assets.
In the year ended 31 March 2020, to reflect the increased level
of risk and volatility arising from the COVID-19 pandemic and the
significance of exceptional items, our benchmark has changed to
no longer exclude exceptional items. Our resulting benchmark was
profit before tax, adjusted for gains/losses on financial instruments.
Profit before tax, adjusted
for gains/losses on financial
instruments £328.1m
Group materiality
Group materiality
£16.4m
Component materiality
range of £14.3m to
£0.50m
Audit Committee
reporting threshold
£0.75m
6.2. Performance materiality
We set performance materiality at a level lower than materiality to
reduce the probability that, in aggregate, uncorrected and undetected
misstatements exceed the materiality for the financial statements as
a whole. Group performance materiality was set at 70% of Group
materiality for the 2020 audit (2019: 70%). In determining performance
materiality, we considered our assessment of the control environment,
considering the potential reduction in the effectiveness of the internal
control environment as a result of changes in working patterns since
March 2020, as well as the continuity of the business year-on-year. We
also considered the value of uncorrected misstatements identified in
previous years.
6.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the
Committee all audit differences in excess of £750,000 (2019: £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.
7.
AN OVERVIEW OF THE SCOPE OF OUR AUDIT
Identification and scoping of components
7.1.
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 a Group level.
Regulated Water and Waste Water is primarily comprised of
Severn Trent Water Limited which was subject to a full scope
audit using materiality of £14.3 million, (2019: £15.0 million).
We have audited a further seven components using statutory
materiality which ranges from £0.50 million to £9 million (2019: nine
components using statutory materiality which range from £34,000
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% (2019: over 95%) of the Group’s net
operating assets and profit before tax adjusted for gains/losses
on financial instruments.
At the Group 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.
134
Severn Trent Plc Annual Report and Accounts 2020 7.2. Our consideration of the control environment
The Group uses SAP, a financial accounting software platform, in
all of its legal entities except those acquired as part of the Agrivert
acquisition in 2019. The entities acquired under the Agrivert acquisition
are not subject to a full scope audit as part of our Group audit of
Severn Trent Plc. We utilised our IT specialists to assess and test
relevant controls over the SAP system.
From our walkthroughs and understanding of the entity and the
controls at the business cycle and account balance levels, we
relied on controls over the accurate capitalisation of project
expenses between capital and operating expenditure.
8. 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
9.
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.
10.
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 and non-compliance with
laws and regulations 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.
11.
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.
11.1. 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, we considered the following:
– the nature of the industry and sector, control environment and
business performance including the design of the Group’s
remuneration policies, key drivers for Directors’ remuneration,
bonus levels and performance targets;
– results of our enquiries of management, internal audit, and Audit
Committee about their own identification and assessment of the
risks of irregularities;
– any matters we identified having obtained and reviewed the Group’s
documentation of their 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 of fraud or
non-compliance with laws and regulations;
– the matters discussed among the audit engagement team and
involving relevant internal specialists, including tax, valuations,
pensions, IT, and financial instrument specialists regarding how
and where fraud might occur in the financial statements and any
potential indicators of fraud.
As a result of these procedures, we considered the opportunities
and incentives that may exist within the organisation for fraud and
identified the greatest potential for fraud in the following areas:
– the valuation of the provision for household trade receivables
in Severn Trent Water Limited;
– the classification and valuation of capital expenditure in
Severn Trent Water Limited; and
– accounting for the joint venture investment.
In common with all audits under ISAs (UK), we are also
required to perform specific procedures to respond to the
risk of management override.
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Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF SEVERN TRENT PLC
CONTINUED
We also obtained an understanding of the legal and regulatory
framework that the Group operates in, focusing on provisions of those
laws and regulations that had a direct effect on the determination of
material amounts and disclosures in the financial statements. The key
laws and regulations we considered in this context included the UK
Companies Act, Listing Rules, pensions legislation and tax legislation.
In addition, we considered provisions of other laws and regulations that
do not have a direct effect on the financial statements but compliance
with which may be fundamental to the Group’s ability to operate or
to avoid a material penalty. These included the licence conditions
imposed by The Water Services Regulation Authority (Ofwat).
11.2. Audit response to risks identified
As a result of performing the above, we identified the valuation of
the provision for household trade receivables in Severn Trent Water,
the classification and valuation of capital expenditure in Severn Trent
Water Limited, and accounting for the joint venture investment as
key audit matters related to the potential risk of fraud. 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.
Our procedures to respond to risks identified included the following:
– reviewing the financial statement disclosures and testing to
supporting documentation to assess compliance with provisions
of relevant laws and regulations described as having a direct
effect on the financial statements;
– 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 judgements 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
12.
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
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.
13.
MATTERS ON WHICH WE ARE REQUIRED
TO REPORT BY EXCEPTION
13.1. 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.
13.2. 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.
14. OTHER MATTERS
14.1. 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 15 years, covering the years ended 31 March 2006 to
31 March 2020.
14.2. 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).
15. 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
19 May 2020
136
Severn Trent Plc Annual Report and Accounts 2020 CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 MARCH 2020
Turnover
Other income
Operating costs before charge for bad and
doubtful debts
Charge for bad and doubtful debts
Total operating costs
Profit before interest and tax
Finance income
Finance costs
Net finance costs
Impairment of loans receivable
Net (losses)/gains on financial instruments
Share of net loss 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
Note
5,6
7
7
10
11
8
12
20
13
13
13
Underlying
£m
1,843.5
6.9
(1,237.2)
(42.9)
(1,280.1)
570.3
59.9
(248.3)
(188.4)
–
(17.4)
–
364.5
(30.1)
(29.1)
(59.2)
Non-underlying
items1
£m
2020
Total
£m
–
–
1,843.5
6.9
(2.1)
(1,239.3)
–
(2.1)
(2.1)
–
–
–
(4.9)
–
(46.8)
(53.8)
(0.9)
(91.8)
(92.7)
(42.9)
(1,282.2)
568.2
59.9
(248.3)
(188.4)
(4.9)
(17.4)
(46.8)
310.7
(31.0)
(120.9)
(151.9)
158.8
Profit for the year
305.3
(146.5)
1 For definition of non-underlying items see note 44.
EARNINGS PER SHARE (PENCE)
Basic
Diluted
Non-underlying
items1
£m
–
–
2019
Total
£m
1,767.4
19.9
(10.3)
(1,198.4)
–
(10.3)
(10.3)
–
–
–
–
–
–
(10.3)
–
1.8
1.8
(8.5)
2020
66.7
66.3
(25.6)
(1,224.0)
563.3
68.9
(263.1)
(194.2)
–
16.0
(0.4)
384.7
(31.8)
(37.6)
(69.4)
315.3
2019
133.4
133.2
Underlying
£m
1,767.4
19.9
(1,188.1)
(25.6)
(1,213.7)
573.6
68.9
(263.1)
(194.2)
–
16.0
(0.4)
395.0
(31.8)
(39.4)
(71.2)
323.8
Note
15
15
137
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 2020
Profit for the year
Other comprehensive income/(loss)
Items that will not be reclassified to the income statement:
Net actuarial gains
Current tax on pension contributions in prior periods
Deferred tax on pension contributions in prior periods
Deferred tax on net actuarial gains
Deferred tax arising on rate change
Items that may be reclassified to the income statement:
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
Other comprehensive income for the year
Total comprehensive income for the year
Note
28
13
13
13
13
13
12
13
2020
£m
158.8
187.4
9.5
(9.5)
(32.9)
2.7
157.2
(38.9)
7.4
8.2
(1.6)
(24.9)
132.3
291.1
2019
£m
315.3
57.9
9.5
(9.5)
(12.2)
–
45.7
(8.6)
1.5
8.2
(1.3)
(0.2)
45.5
360.8
138
Severn Trent Plc Annual Report and Accounts 2020 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MARCH 2020
Equity attributable to owners of the Company
As at 1 April 2018
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
Current tax on pension contributions in prior periods
Deferred tax on pension contributions in prior periods
Deferred tax on net actuarial gains
Total comprehensive income 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
Adjustment on adoption of IFRS 16
As at 1 April 2019
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
Current tax on pension contributions in prior periods
Deferred tax on pension contributions in prior periods
Deferred tax on net actuarial gains
Deferred tax arising from rate change
Total comprehensive income for the year
Share options and LTIPs
- proceeds from shares issued
- value of employees’ services
Deferred tax on share based payments
Dividends paid
As at 31 March 2020
Note
Share capital
£m
Share premium
£m
Other reserves
£m
235.1
117.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
13
12
13
28
13
13
13
30,31
0.8
10.3
37
13
14
2
13
12
13
28
13
13
13
13
30,31
37
13
14
–
–
–
–
235.9
–
235.9
–
–
–
–
–
–
–
–
–
–
–
0.6
–
–
–
–
–
–
–
128.0
–
128.0
–
–
–
–
–
–
–
–
–
–
–
9.0
–
–
–
93.0
–
(8.6)
1.5
8.2
(1.3)
–
–
–
–
(0.2)
–
–
–
–
–
92.8
–
92.8
–
(38.9)
7.4
8.2
(1.6)
–
–
–
–
–
(24.9)
–
–
–
–
236.5
137.0
67.9
Retained
earnings
£m
551.1
315.3
–
–
–
–
57.9
9.5
(9.5)
(12.2)
361.0
–
8.1
(1.1)
0.2
(211.9)
707.4
(1.6)
705.8
158.8
–
–
–
–
187.4
9.5
(9.5)
(32.9)
2.7
316.0
–
8.1
0.8
Total
£m
996.9
315.3
(8.6)
1.5
8.2
(1.3)
57.9
9.5
(9.5)
(12.2)
360.8
11.1
8.1
(1.1)
0.2
(211.9)
1,164.1
(1.6)
1,162.5
158.8
(38.9)
7.4
8.2
(1.6)
187.4
9.5
(9.5)
(32.9)
2.7
291.1
9.6
8.1
0.8
(228.4)
802.3
(228.4)
1,243.7
139
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information
CONSOLIDATED BALANCE SHEET
AS AT 31 MARCH 2020
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Right-of-use assets
Investments in joint ventures
Derivative financial instruments
Trade and other receivables
Retirement benefit surplus
Current assets
Inventory
Trade and other receivables
Current tax receivable
Derivative financial instruments
Cash and cash equivalents
Current liabilities
Borrowings
Derivative financial instruments
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 19 May 2020.
Christine Hodgson
Chair
James Bowling
Chief Financial Officer
Company Number 02366619
140
Note
16
17
18
19
20
21
22
28
22
21
23
24
25
26
29
24
25
26
27
28
29
30
31
32
2020
£m
91.4
153.8
2019
£m
90.9
124.2
9,580.8
9,085.6
128.8
–
65.5
153.7
21.3
–
37.0
68.4
204.0
18.6
10,195.3
9,628.7
29.2
525.5
3.1
–
48.6
606.4
(475.4)
(4.4)
(573.6)
–
(18.9)
(1,072.3)
(465.9)
20.8
513.5
–
0.1
41.0
575.4
(197.0)
–
(496.7)
(9.3)
(32.2)
(735.2)
(159.8)
(5,957.7)
(5,857.2)
(159.2)
(126.5)
(1,187.3)
(1,082.9)
(901.1)
(255.3)
(25.1)
(747.5)
(471.5)
(19.2)
(8,485.7)
(8,304.8)
1,243.7
1,164.1
236.5
137.0
67.9
802.3
235.9
128.0
92.8
707.4
1,243.7
1,164.1
Severn Trent Plc Annual Report and Accounts 2020
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 MARCH 2020
Cash generated from operations1
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
Proceeds on disposal of property, plant and equipment
Net loans repaid by joint ventures
Interest received
Net cash outflow from investing activities
Cash flow from financing activities
Interest paid
Interest element of lease payments
Dividends paid to shareholders of the parent
Repayments of borrowings
Principal elements of lease payments
New loans raised
Issues of shares
Payments for swap terminations
Proceeds from swap terminations
Purchase of own shares
Net cash (outflow)/inflow from financing activities
Net movement in cash and cash equivalents
Net cash and cash equivalents at the beginning of the year
Net cash and cash equivalents at end of year
Cash at bank and in hand
Bank overdrafts
Short-term deposits
Note
39
39
39
23
24
23
2020
£m
928.1
0.4
(34.3)
894.2
–
–
(777.2)
(74.8)
12.9
35.6
2.0
2019
£m
872.8
–
(21.3)
851.5
(50.9)
(6.2)
(782.1)
(35.1)
1.4
–
0.8
(801.5)
(872.1)
(181.9)
(4.3)
(228.4)
(3.0)
(5.5)
330.1
9.6
(16.8)
16.5
–
(83.7)
9.0
39.6
48.6
37.3
–
11.3
48.6
(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
1 Contributions and grants received have been presented as operating cash flows in 2019/20 as these credits are released to operating costs over the useful economic life of the non-current
asset to which they relate. These were presented as investment cash flows in prior periods. Comparatives have been restated increasing operating cash inflows by £46.5 million and
increasing investing cash outflows by the same amount.
141
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information
NOTES TO THE GROUP FINANCIAL STATEMENTS
GENERAL INFORMATION
1
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.
ACCOUNTING POLICIES
2
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 68 which sets out the Group’s considerations relating to viability
and going concern) 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 2020.
(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.
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.
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 Partnerships (Accounts)
Regulations 2008 from the requirements of Regulations 4 to 6.
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
Amendments to IFRS 9
The Group has early adopted the amendments to IFRS 7 and IFRS 9
introduced to provide temporary relief from applying specific hedge
accounting requirements to hedging relationships directly affected by
the planned replacement of benchmark interest rates such as LIBOR.
Details of the Group’s management of the impacts of the replacement
of such benchmarks and the Group’s risk exposure that is affected
by interest rate benchmark reform are set out in note 36.
IFRS 16
In the current financial year the Group has adopted IFRS 16 Leases.
The Group has adopted IFRS 16 Leases retrospectively from 1 April
2019, but has not restated comparatives for prior reporting periods,
as permitted under the specific transitional provisions in the standard.
The reclassifications and the adjustments arising from the new
leasing rules are therefore recognised in the opening balance sheet
on 1 April 2019.
Adjustments recognised on adoption of IFRS 16
On adoption of IFRS 16, the Group recognised lease liabilities in
relation to leases which had previously been classified as ‘operating
leases’ under the principles of IAS 17 Leases. These liabilities were
measured at the present value of the remaining lease payments,
discounted using the Group’s incremental borrowing rate as at
1 April 2019. The Group’s weighted average incremental borrowing
rate applied to the lease liabilities on 1 April 2019 was 3.14%.
For leases previously classified as finance leases the Group
recognised the carrying amount of the right-of-use asset and
lease liability immediately before transition as the carrying amount
of the right-of-use asset and the lease liability at the date of initial
application. There have been no remeasurement amounts of leases
previously classified as finance leases under IFRS 16 principles.
Operating lease commitments disclosed as at 31 March 2019
Add: adjustments as a result of a different treatment of
extension and termination options
Add: finance lease liabilities recognised as at 31 March 2019
Less: short-term leases recognised on a straight-line basis
as an expense
Less: low-value leases recognised on a straight-line basis
as an expense
Discounted using the lessee’s incremental borrowing rate
at the date of initial application
Lease liability recognised as at 1 April 2019
Recognised at 31 March 2020 as:
Current lease liabilities
Non-current lease liabilities
£m
17.5
10.6
112.2
(1.0)
(0.1)
(11.1)
128.1
5.8
116.9
122.7
The associated right-of-use assets for property leases were measured
on a retrospective basis as if the new rules had always been applied.
Other right-of-use assets were measured at the amount equal to the
lease liability, adjusted by the amount of any prepaid or accrued lease
payments relating to that lease recognised in the balance sheet as
at 31 March 2019. There were no onerous lease contracts that would
have required an adjustment to the right-of-use assets at the date of
initial application.
142
Severn Trent Plc Annual Report and Accounts 2020 The recognised right-of-use assets relate to the following types of assets:
Land and buildings
Infrastructure assets
Fixed plant and equipment
Moveable plant
31 March
2020
£m
10.4
113.8
4.2
0.4
1 April
2019
£m
11.7
114.8
7.8
0.8
Total right-of-use assets
128.8
135.1
The change in accounting policy affected the following items in the
balance sheet on 1 April 2019:
Until the current financial year, leases of property, plant and
equipment were classified as either finance or operating leases.
Payments made under operating leases (net of any incentives
received from the lessor) were charged to profit or loss on a straight-
line basis over the period of the lease.
From 1 April 2019, leases are recognised as right-of-use assets
with a corresponding liability at the date at which the leased assets
are available for use by the Group. Each lease payment is allocated
between the liability and finance cost. The finance cost is charged to
profit or loss over the lease period so as to produce a constant periodic
rate of interest on the remaining balance of the liability for each period.
The right-of-use asset is depreciated over the shorter of the asset’s
useful life and the lease term on a straight-line basis.
Property, plant and equipment
Right-of-use assets
Deferred tax
Provisions
Borrowings
Retained earnings
Impact on segment disclosure and earnings per share
£m
(118.8)
135.1
0.4
(2.4)
(15.9)
1.6
Assets and liabilities arising from a lease are initially measured on
a present value basis. Lease liabilities include the net present value
of the following lease payments:
– fixed payments (including in-substance fixed payments),
less any lease incentives receivable;
– variable lease payments that are based on an index or a rate;
– amounts expected to be payable by the lessee under residual
value guarantees;
– the exercise price of a purchase option if the lessee is reasonably
certain to exercise that option; and
– payments of penalties for terminating the lease, if the lease term
reflects the lessee exercising that option.
Year ended 31 March 2020
Segment assets
Segment liabilities
Regulated Water
and Waste Water
£m
Business
Services
£m
Corporate
and other
£m
7.1
–
7.1
6.4
(2.4)
4.0
1.0
–
1.0
Basic and diluted earnings per share decreased by 0.3 pence per share
for the year ended 31 March 2020 as a result of the adoption of IFRS16.
Underlying basic and diluted earnings per share also decreased by
0.3 pence per share.
In applying IFRS 16 for the first time, the Group has used the following
practical expedients permitted by the standard:
– the use of a single discount rate to a portfolio of leases with
reasonably similar characteristics;
– reliance on previous assessments on whether leases are onerous;
– accounting for operating leases with a remaining lease term of less
than 12 months at 1 April 2019 as short-term leases per asset class;
– accounting for operating leases of low-value assets as at 1 April 2019
on an individual basis;
– the exclusion of initial direct costs for the measurement of the
right-of-use asset at the date of initial application; and
– the use of hindsight in determining the lease term where the
contract contains options to extend or terminate the lease.
The Group has also elected not to reassess whether a contract is,
or contains, a lease at the date of initial application. Instead, for
contracts entered into before the transition date the Group relied
on its assessment made applying IAS 17 and IFRIC 4 Determining
whether an Arrangement contains a Lease.
Leasing activities
The Group leases various land and buildings, plant and equipment and
vehicles. Rental agreements are typically made for fixed periods of 1 to
999 years but may have extension options as described below. Lease
terms are negotiated on an individual basis and contain a wide range of
different terms and conditions. The lease agreements do not impose
any covenants, but leased assets may not be used as security for
borrowing purposes.
The lease payments are discounted using the interest rate implicit in
the lease. If that rate cannot be determined, the Group’s incremental
borrowing rate is used, being the rate that the Group would have to
pay to borrow the funds necessary to obtain an asset of similar value
in a similar economic environment with similar terms and conditions.
Right-of-use assets are measured at cost comprising the following:
the amount of the initial measurement of lease liability; any lease
payments made at or before the commencement date less any lease
incentives received; any initial direct costs; and restoration costs.
Payments associated with short-term leases and leases of low-value
assets are recognised on a straight-line basis as an expense in profit
or loss. Short-term leases are leases with a lease term of less than
12 months.
Extension and termination options
Extension and termination options are included in a number of
property and equipment leases across the Group. These terms are
used to maximise operational flexibility in managing contracts. The
majority of extension and termination options held are exercisable
only by the Group and not by the respective lessor.
In determining the lease term, the Group considers all facts and
circumstances that create an economic incentive to exercise an
extension option, or not exercise a termination option. Extension
options (or periods after termination options) are only included in
the lease term if the lease is reasonably certain to be extended (or
not terminated). The assessment is reviewed if a significant event
or a significant change in circumstances occurs which affects this
assessment and that is within the control of the Group. During the
current financial year, there has been no financial effect of revising lease
terms to reflect the effect of exercising extension or termination options.
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
excluded from the date of disposal.
Subsidiaries are consolidated where the Group has the power
to control a subsidiary.
143
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information NOTES TO THE GROUP FINANCIAL STATEMENTS
CONTINUED
ACCOUNTING POLICIES (CONTINUED)
2
b) Basis of consolidation (continued)
Joint venture undertakings are accounted for on an equity basis where
the Group exercised joint control under a contractual arrangement.
Taxation
e)
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.
Goodwill
f)
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.
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.
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.
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 6. The expected turnover over the life
of a contract is allocated to each performance obligation based on
the standalone selling price of each performance obligation, which
is based on the forecast costs incurred and 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.
Exceptional items
d)
Exceptional items are income or expenditure, which individually or in
aggregate, if of a similar type, 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.
144
Severn Trent Plc Annual Report and Accounts 2020 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
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:
Years
3 – 10
15 – 25
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.
Property, plant and equipment
i)
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.
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
Leased assets
j)
Where the Group enters into a contract that contains a lease, it
recognises a right-of-use asset and a lease liability. The right-of-use
asset is measured at cost, which includes: the amount of the initial
measurement of the lease liability (see below); any lease payments
made at or before the commencement date less any lease incentives
received; any initial direct costs incurred by the Group; and an estimate
of any remediation or similar costs required by the lease contract.
At the commencement date the lease liability is measured at
the present value of the future lease payments discounted using
the interest rate implicit in the lease or, if that cannot be readily
determined, the Group’s incremental borrowing rate. Lease
liabilities are included in borrowings.
Lease payments are treated as consisting of a capital element and
a finance charge; the capital element reduces the lease liability 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 of the right-of-use asset is charged over
the shorter of the estimated useful life and the lease period unless
ownership is expected to transfer to the Group at the end of the lease,
in which case the right-of-use asset is depreciated to the end of the
useful life of the underlying asset.
Where the lease term is less than one year or the underlying asset is
low value, the Group does not recognise a right-of-use asset or lease
liability. Payments under such leases are charged to operating costs.
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.
145
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information
NOTES TO THE GROUP FINANCIAL STATEMENTS
CONTINUED
ACCOUNTING POLICIES (CONTINUED)
Impairment of non-current assets
2
l)
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. For regulated businesses
we use the WACC from Ofwat’s latest price review adjusted for market
changes since this date where appropriate.
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. Impairments are recognised
in line with policy set out in 2 l) above.
Inventories
n)
Inventories are 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.
Loans receivable
o)
Loans receivable are measured at fair value on initial recognition,
less issue fee income received where the fee is integral to the yield
on the loan. All loans receivable are held for collection of contractual
cash flows, which represent solely payments of principal and interest.
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.
The Group recognises a loss allowance for expected credit losses
(‘ECL’) on its loans and receivables to joint ventures. The amount of
expected credit losses is updated at each reporting date to reflect
changes in credit risk since initial recognition.
The Group recognises lifetime ECL when there has been a significant
increase in credit risk since initial recognition. If the credit risk has not
increased significantly since initial recognition, the Group measures
the loss allowance at an amount equal to the 12 month ECL.
Lifetime ECL represents the expected credit losses that will result
from all possible default events over the expected life of the loans.
In contrast, 12 month ECL represents the portion of lifetime ECL
that is expected to result from default events that are possible
within 12 months after the reporting date.
146
Significant increase in credit risk
(i)
In assessing whether the credit risk has increased significantly since
initial recognition, the Group compares the risk of default over the
remaining life of the asset at the reporting date with the risk of default
for the same period at initial recognition. In making this assessment,
the Group considers both quantitative and qualitative information about
the risk of default that is reasonable and supportable, including
forward-looking information that is available. This includes assessment
of a deterioration in: actual or expected business; financial or economic
conditions of the borrower; actual or expected operating results, cash
flows and financial position of the borrower; and the regulatory,
economic, or technological environment faced by the borrower.
Irrespective of the outcome of the above assessment, the Group
presumes that the credit risk on a financial asset has increased
significantly since initial recognition when contractual payments are
more than 30 days past due, unless the Group has reasonable and
supportable information that demonstrates otherwise.
(ii) Definition of default
The Group considers that a default has taken place where information
developed internally indicates that the borrower is unlikely to pay its
creditors, including the Group, in full.
Irrespective of the above analysis, the Group considers that default has
occurred when a financial asset is more than 90 days past due unless
the Group has reasonable and supportable information to demonstrate
that a more lagging default criterion is more appropriate.
Trade receivables and accrued income
p)
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 and other 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 and reasonable, supportable
forward-looking information which is available without undue cost
or effort.
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 2020 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.
Provisions
r)
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.
Purchase of own shares
s)
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.
Borrowings
t)
The accounting policy for borrowings that are the hedged item in
a fair value hedge is set out in note 2 u) and the accounting policy
for lease liabilities is set out in note 2 j).
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.
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.
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 economic relationship between the hedging instrument
and the hedged item;
– its risk management objectives and strategy for undertaking
the hedge transaction; and
– whether changes in fair value or the cash flows of the hedging
instrument are expected to offset changes in fair values
or cash flows (as appropriate) of the hedged item.
Hedge accounting is discontinued when the hedging instrument
expires, is sold, terminated or exercised, or no longer qualifies for
hedge accounting.
Fair value hedges
Where a loan or borrowing is in a fair value hedging relationship it is
remeasured for changes in fair value of the hedged risk at the balance
sheet date, with gains or losses being recognised in gains/losses on
financial instruments in the income statement. The gain or loss on the
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.
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.
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 host contract is not an asset within the scope of IFRS 9 and:
– the risks and characteristics of the embedded derivative are
not closely related to those of the contract;
– a separate instrument with the same terms as the embedded
derivative would meet the definition of a derivative; 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.
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CONTINUED
ACCOUNTING POLICIES (CONTINUED)
Share based payment
2
v)
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) 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 below.
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 the fair value less costs to sell. Depreciation is not charged on
such assets.
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.
NEW ACCOUNTING POLICIES AND FUTURE REQUIREMENTS
3
At the balance sheet date, no Standards or Interpretations were in
issue but not yet effective that are expected to have a material impact
on the Group’s financial position.
4
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)
i)
Critical accounting judgments
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 that Group has developed to facilitate the
consistent application of its accounting policies.
ii)
Classification of loans to Water Plus for the purpose of
determining the share of joint venture losses to be recognised
Water Plus, the Group’s joint venture, incurred a loss after tax of
£103.3 million in the year ended 31 March 2020. The Group’s share of
the loss is £51.7 million but, since the Group has no obligation to make
any further contribution to Water Plus, the Group is not required to
recognise losses in excess of its net investment in the joint venture. At
1 April 2019 the Group’s equity investment in Water Plus was £37.0 million
and this has been entirely written off by the losses in the year. The
Group has also advanced loans to Water Plus under varying terms.
Assessing whether any of these loans form part of the Group’s net
investment in Water Plus under IAS 28 requires judgments to be made.
The Group holds a loan of £12.5 million under a zero coupon
subordinated loan note (‘the note’). The note was issued at par and
does not bear interest. It is repayable in full in 2027. Since the note
does not bear interest the Group considers that the note forms part
of its net investment in Water Plus and therefore should be taken
into account in determining the amount of the Group’s share of Water
Plus’s losses that should be recognised. At 31 March 2020 the note was
carried at a value of £9.8 million, before writing off any of the Group’s
share of Water Plus’s losses against it. The difference between the
carrying value of the note and its par value was included in the Group’s
equity investment in Water Plus. The Group has recognised £9.8 million
of Water Plus’s losses against the value of the note.
The Group has also made available revolving credit facilities (‘RCFs’) from
Severn Trent Plc and Severn Trent Water in the sums of £32.5 million and
£100.0 million respectively. The RCFs bear interest at LIBOR plus 2.1% and
1.73% respectively and are repayable in September 2021. The amount
drawn down on the facilities fluctuates with Water Plus’s working capital
requirements. The Group considers that these facilities have been
advanced on arm’s length commercial terms and that they do not form
part of the Group’s net investment in Water Plus. None of Water Plus’s
losses have been written off against the amount receivable on the RCFs.
148
Severn Trent Plc Annual Report and Accounts 2020 iii) Classification of share of joint venture losses as exceptional
The Group’s accounting policy defining exceptional items is set out in
note 2 above. Further details of the components of this loss are set out
in the CFO’s review on page 51, which indicates that £14.3 million arose
from trading activities in the year excluding the impacts of COVID-19
and that £32.5 million arose from asset impairments resulting from
COVID-19. The Group considers that the impacts of COVID-19 are
exceptional within the parameters of the Group’s accounting policy
since the impact is material and unusual.
IAS 28 requires that the share of loss of joint ventures is presented
as a single figure in the income statement. The Group has considered
whether to present the entire loss as underlying or as exceptional.
In view of significantly larger portion of the total loss that arose
from the COVID-19 related losses compared to the amount
attributable to underlying trading of the joint venture and the
accounting requirements of IAS 28, the Group considers that
presentation of the share of loss of joint ventures as exceptional
is the most relevant and reliable available under the requirements
of IAS 28.
b)
i)
Sources of estimation uncertainty
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 45 years. A five year change in the average useful lives would
result in a £37 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, and, where market prices are not
available, the values of the assets held. 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.
SEGMENTAL ANALYSIS
5
a) Background
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 (excluding
Bioresources and Developer Services), its retail services to domestic
customers, and Hafren Dyfrdwy Cyfyngedig.
Business Services includes the Group’s Operating Services businesses
in the UK and Ireland, the Green Power business, the Bioresources
business, the Property Development business and our other businesses
including Developer Services, affinity products and searches.
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.
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 38 to 49 of the Strategic report
and those of Business Services on page 50.
Results from interests in joint ventures 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 44). A segmental analysis of turnover
and underlying PBIT is presented below.
Goodwill is allocated and monitored at the segment level.
Transactions between reportable segments are included within
segmental results, assets and liabilities in accordance with Group
accounting policies. These are eliminated on consolidation.
Segmental results
b)
The following table shows the segmental turnover and PBIT:
Year ended 31 March
External turnover
Inter-segment turnover
Total turnover
Underlying PBIT
Exceptional operating items and amortisation of acquired intangible assets
Profit before interest and tax
The reportable segments’ turnover is reconciled to Group turnover as follows:
Regulated Water
and Waste Water
£m
1,620.7
–
1,620.7
511.5
–
511.5
2020
Business
Services
£m
222.8
17.6
240.4
64.9
(2.1)
62.8
Year ended 31 March
Regulated Water and Waste Water
Business Services
Corporate and other
Consolidation adjustments
Regulated Water
and Waste Water
£m
1,583.1
–
1,583.1
527.0
(8.9)
518.1
2020
£m
1,620.7
240.4
0.7
(18.3)
2019
Business
Services
£m
183.4
17.5
200.9
64.1
(1.0)
63.1
2019
£m
1,583.1
200.9
0.4
(17.0)
1,843.5
1,767.4
Included in the revenues of Regulated Water and Waste Water of £1,620.7 million (2019: £1,583.1 million) is £306.6 million (2019: £335.0 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 2020 or 2019.
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CONTINUED
SEGMENTAL ANALYSIS (CONTINUED)
Segmental results (continued)
5
b)
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
Underlying PBIT
Exceptional operating items and amortisation of acquired intangible assets:
Regulated Water and Waste Water
Business Services
Corporate and other
Net finance costs
Impairment of loans receivable
Net (losses)/gains on financial instruments
Share of net loss of joint ventures accounted for using the equity method
Profit on ordinary activities before taxation
2020
£m
511.5
64.9
(5.6)
(0.5)
2019
£m
527.0
64.1
(8.2)
(9.3)
570.3
573.6
–
(2.1)
–
(8.9)
(1.0)
(0.4)
(188.4)
(194.2)
(4.9)
(17.4)
(46.8)
310.7
–
16.0
(0.4)
384.7
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.
Segmental capital employed
c)
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.
Operating assets
Goodwill
Investments in joint ventures
Segment assets
Segment operating liabilities
Capital employed
Regulated Water
and Waste Water
£m
9,883.0
63.5
–
9,946.5
(1,991.8)
7,954.7
2020
Business
Services
£m
626.3
29.2
–
655.5
(42.4)
613.1
Regulated Water
and Waste Water
£m
9,214.4
63.5
–
9,277.9
(1,986.3)
7,291.6
2019
Business
Services
£m
622.3
28.7
37.0
688.0
(68.7)
619.3
Operating assets comprise other intangible assets, property, plant and equipment, right-of-use assets, retirement benefit surpluses, inventory
and trade and other receivables.
Operating liabilities comprise trade and other payables, retirement benefit obligations and provisions.
150
Severn Trent Plc Annual Report and Accounts 2020 The reportable segments’ assets are reconciled to the Group’s total assets as follows:
Segment assets
Regulated Water and Waste Water
Business Services
Corporate and other
Other financial assets
Loans receivable from joint venture
Current tax receivable
Consolidation adjustments
Total assets
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 payable
Deferred tax
Consolidation adjustments
Total liabilities
2020
£m
2019
£m
9,946.5
9,277.9
655.5
3.7
114.1
92.6
3.1
(13.8)
688.0
4.0
109.5
142.0
–
(17.3)
10,801.7
10,204.1
2020
£m
2019
£m
(1,991.8)
(1,986.3)
(42.4)
(42.3)
(68.7)
(62.3)
(6,596.8)
(6,180.7)
–
(901.1)
16.4
(9.3)
(747.5)
14.8
(9,558.0)
(9,040.0)
The consolidation adjustments comprise elimination of intra-group creditors.
The following table shows the additions to other intangible assets, property, plant and equipment and right-of-use assets:
Other intangible assets
Property, plant and equipment
Right-of-use assets
d) Geographical areas
The Group’s sales were derived from the following countries:
UK
Other
Regulated Water
and Waste Water
£m
60.7
946.8
–
2020
Business
Services
£m
1.8
9.4
0.3
Regulated Water
and Waste Water
£m
36.1
851.1
–
2019
Business
Services
£m
2.3
10.3
–
2020
£m
2019
£m
1,838.9
1,762.8
4.6
4.6
1,843.5
1,767.4
The Group’s non-current assets (excluding financial instruments, deferred tax assets and post-employment benefit assets) were located in the
UK in 2020 and 2019.
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NOTES TO THE GROUP FINANCIAL STATEMENTS
CONTINUED
REVENUE FROM CONTRACTS WITH CUSTOMERS
6
Revenue recognised from contracts with customers is analysed by type of revenue and by business segment below:
Year ended 31 March 2020
Water and waste water services
Operating services
Renewable energy
Other sales
Intra-group sales
Year ended 31 March 2019
Water and waste water services
Operating services
Renewable energy
Other sales
Intra-group sales
Regulated Water
and Waste Water
£m
Business
Services
£m
Corporate
and other
£m
Consolidation
adjustments
£m
1,616.4
–
–
4.3
–
57.1
70.7
81.2
13.8
17.6
1,620.7
240.4
–
–
–
–
0.7
0.7
–
–
–
–
(18.3)
(18.3)
Regulated Water
and Waste Water
£m
1,581.7
–
–
1.4
–
Business
Services
£m
Corporate
and other
£m
Consolidation
adjustments
£m
54.5
57.1
46.2
25.7
17.4
–
–
–
–
0.4
0.4
–
–
–
0.8
(17.8)
(17.0)
1,583.1
200.9
Group
£m
1,673.5
70.7
81.2
18.1
–
1,843.5
Group
£m
1,636.2
57.1
46.2
27.9
–
1,767.4
Revenue from water and waste water services provided to customers with meters is recognised when the service is provided and is measured
based on actual meter readings and estimated consumption for the period between the last meter reading and the year end. For customers who
are not metered, the performance obligation is to stand ready to provide water and waste water services throughout the period. Such customers
are charged on an annual basis, coterminous with the financial year, and revenue is recognised on a straight-line basis over the financial year.
Income from diversions of £6.8 million (2018/19: £8.4 million), which is reimbursement of costs for diversions, is included within infrastructure
maintenance expenditure within operating costs.
The Operating Services business includes a material 25-year contract with multiple performance obligations. Under this contract the Group bills
the customer based on an inflation-linked volumetric tariff and invoices are payable on normal commercial terms. The performance obligations,
which are satisfied as the services are performed, are: operating and maintaining the customer’s infrastructure assets; upgrading the customer’s
infrastructure assets; administrating the services received from statutory water and sewerage undertakers; administrating billing services of
the customer’s commercial and Non Base Dependent customers. Revenue has been allocated to each performance obligation based on the
stand-alone selling price of each performance obligation, which is based on the forecast costs incurred and expected margin for each obligation.
Changes to projected margins are adjusted on a cumulative basis in the period that they are identified.
Other than the provision of water and waste water services, there is no direct correlation between the satisfaction of the performance obligations
and the timing of billing and customer payments. The estimated transaction price for the contract is derived from estimates of the customer’s
consumption at the contract tariff rate, adjusted for inflation. This estimate is updated on an annual basis. There was no significant change in
the estimated transaction price in the year. At 31 March 2020 the aggregate amount of the estimated transaction price allocated to performance
obligations that were not satisfied was £459.3 million (2019: £509.6 million). This amount is expected to be recognised as revenue as follows:
In the next year
Between one and five years
After more than five years
2020
£m
43.6
177.6
238.1
459.3
2019
£m
43.5
178.1
288.0
509.6
The assumptions and other sources of estimation uncertainty in relation to this contract do not present a significant risk of a material adjustment
to the carrying amounts of assets and liabilities in the next financial year and therefore are not included as a source of estimation uncertainty in
note 4 b).
152
Severn Trent Plc Annual Report and Accounts 2020 Revenue recognised in excess of amounts billed is recorded as a contract asset and amounts billed in excess of revenue recognised is recorded
as a contract liability. Changes in contract assets in the year were as follows:
Contract asset at 1 April
Amounts billed
Revenue recognised
Contract asset at 31 March
2020
£m
35.1
(47.6)
49.1
36.6
2019
£m
39.1
(46.1)
42.1
35.1
No revenue recognised in the year was included as a contract liability at the beginning of the year (2019: nil). No revenue recognised in the year
is from performance obligations satisfied in previous periods (2019: nil).
7
NET OPERATING COSTS
Wages and salaries
Social security costs
Pension costs
Share based payments
Total employee costs
Power
Raw materials and consumables
Rates
Charge for bad and doubtful debts
Service charges
Depreciation of property, plant and equipment
Depreciation of right-of-use assets
Amortisation of intangible assets
Hired and contracted services
Rental charges
– land and buildings
– other
Hire of plant and machinery
Loss on disposal of tangible fixed assets
Exchange (gains)/losses
Infrastructure maintenance expenditure
Ofwat licence fees
Other operating costs
Other operating income
Release from deferred credits
Own work capitalised
Before adjusting
and exceptional
costs
£m
Non-underlying
items
£m
Before adjusting
and exceptional
costs
£m
Non-underlying
items
£m
2020
Total
£m
281.1
28.9
25.8
8.1
343.9
94.5
68.4
81.6
42.9
39.4
327.4
6.6
32.9
237.8
0.6
1.3
7.4
1.2
(0.6)
149.6
5.1
42.1
(3.0)
1,479.1
(15.4)
(181.5)
–
–
–
–
–
–
–
–
–
–
–
–
2.1
–
–
–
–
–
–
–
–
–
–
2.1
–
–
252.2
25.5
23.6
8.1
309.4
90.3
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
48.4
(3.3)
1,392.4
(14.7)
(164.0)
1,213.7
281.1
28.9
25.8
8.1
343.9
94.5
68.4
81.6
42.9
39.4
327.4
6.6
30.8
237.8
0.6
1.3
7.4
1.2
(0.6)
149.6
5.1
42.1
(3.0)
1,477.0
(15.4)
(181.5)
1,280.1
2019
Total
£m
252.2
25.5
33.2
8.1
319.0
90.3
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
48.4
(3.3)
–
–
9.6
–
9.6
–
–
–
–
–
–
–
0.7
–
–
–
–
–
–
–
–
–
–
10.3
1,402.7
–
–
(14.7)
(164.0)
10.3
1,224.0
153
Further details of exceptional costs are given in note 8. Other adjusting costs are amortisation of acquired intangible assets.
2.1
1,282.2
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information NOTES TO THE GROUP FINANCIAL STATEMENTS
CONTINUED
NET OPERATING COSTS (CONTINUED)
7
During the year the following fees were charged by the auditors:
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
2020
£m
0.2
0.5
0.7
0.1
0.1
0.2
Other assurance services also include certain agreed upon procedures performed by Deloitte in connection with Severn Trent Water’s
regulatory reporting requirements to Ofwat.
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 93 and 94. No services were provided pursuant to contingent fee arrangements.
Details of Directors’ remuneration are set out in the Directors’ remuneration report on pages 102 to 123.
8
EXCEPTIONAL ITEMS BEFORE TAX
Regulated Water and Waste Water
GMP equalisation costs
Business Services
GMP equalisation costs
Corporate and other
GMP equalisation costs
Exceptional operating costs
Other exceptional items
Exceptional impairment of loans receivable from joint venture (see note 22)
Exceptional share of net losses of joint venture (see note 20)
EMPLOYEE NUMBERS
9
Average number of employees (including Executive Directors) during the year:
By business segment
Regulated Water and Waste Water
Business Services
Corporate and other
154
2019
£m
0.2
0.4
0.6
0.1
0.1
0.2
2019
£m
(8.9)
(8.9)
(0.3)
(0.3)
(0.4)
(0.4)
(9.6)
–
–
(9.6)
2020
£m
–
–
–
–
–
–
–
(4.9)
(46.8)
(51.7)
2020
2019
5,824
5,680
962
10
889
11
6,796
6,580
Severn Trent Plc Annual Report and Accounts 2020 10 FINANCE INCOME
Interest income earned on bank deposits
Other financial income
Total interest receivable
Interest income on defined benefit scheme assets
11 FINANCE COSTS
Interest expense charged on:
Bank loans and overdrafts
Other loans
Lease liabilities
Total borrowing costs
Other financial expenses
Interest cost on defined benefit scheme liabilities
2020
£m
0.4
1.3
1.7
58.2
59.9
2020
£m
21.6
150.5
4.3
176.4
2.6
69.3
248.3
2019
£m
0.2
7.7
7.9
61.0
68.9
2019
£m
21.3
153.0
4.4
178.7
9.6
74.8
263.1
Borrowing costs of £44.2 million (2019: £33.2 million) incurred funding eligible capital projects have been capitalised at an interest rate of 2.68%
(2019: 3.40%). Tax relief of £8.4 million (2019: £5.5 million) was claimed on these costs which was credited to the income statement, offset by a
related deferred tax charge of £8.4 million (2019: £4.9 million).
12 NET (LOSSES)/GAINS ON FINANCIAL INSTRUMENTS
Gain on swaps used as hedging instruments in fair value hedges
(Loss)/gain arising on debt in fair value hedges
Exchange loss on other loans
Loss on cash flow hedges transferred from equity
Hedge ineffectiveness on cash flow hedges
(Loss)/gain arising on swaps where hedge accounting is not applied
Amortisation of fair value adjustment on debt
2020
£m
5.1
(1.6)
(6.7)
(8.2)
2.7
(9.8)
1.1
(17.4)
2019
£m
0.3
0.5
(8.1)
(8.2)
1.9
28.5
1.1
16.0
The net loss on financial assets and liabilities mandatorily measured at fair value through profit or loss was £4.7 million (2019: gain of £28.8 million).
There were no financial assets or liabilities designated as at fair value through the profit or loss (2019: nil).
The Group’s hedge accounting arrangements are described in note 36.
155
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information NOTES TO THE GROUP FINANCIAL STATEMENTS
CONTINUED
13 TAXATION
a) Analysis of tax charge in the year
Current tax
Current year at 19% (2019: 19%)
Prior years
Total current tax
Deferred tax
Origination and reversal of temporary differences:
Current year
Prior years
Exceptional charge on rate change
Total deferred tax
2020
£m
36.2
(5.2)
31.0
29.8
(0.7)
91.8
120.9
151.9
2019
£m
41.2
(9.4)
31.8
30.1
7.5
–
37.6
69.4
Factors affecting the tax charge in the year
b)
The tax expense for the year is higher (2019: lower) than the standard rate of corporation tax in the UK of 19% (2019: 19%). The differences are
explained below:
Profit before taxation
Tax at standard rate of corporation tax in the UK 19% (2019: 19%)
Tax effect of depreciation on non-qualifying assets
Other permanent differences
Current year impact of lower rate for deferred tax
Adjustments in respect of prior years
Exceptional deferred tax arising from rate change
Total tax charge
Profit before taxation
Tax at standard rate of corporation tax in the UK 19% (2019: 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
2020
£m
310.7
59.0
1.3
5.7
–
(5.9)
91.8
151.9
2020
£m
310.7
59.0
1.3
5.7
(26.2)
(3.6)
(5.2)
31.0
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
The most significant factor impacting the Group’s current tax charge is the difference between the depreciation charged on property, plant and
equipment in the financial statements and the amount deductible from taxable profits in the form of capital allowances. Where the assets qualify
for capital allowances this creates a temporary difference and deferred tax is recognised on the difference between the carrying amount of the
asset and the amount that will be deductible for tax purposes in future years. Changes in the amount of deferred tax recognised on these assets
are charged or credited to deferred tax in the income statement. Where the amount of the capital allowances received is greater than the
depreciation charged this is referred to as accelerated capital allowances.
156
Severn Trent Plc Annual Report and Accounts 2020 Certain of the Group’s property, plant and equipment assets are not eligible for capital allowances under current legislation. Therefore there is no tax
deduction that corresponds to the depreciation charged on these assets and deferred tax is not recognised in respect of this permanent difference.
Other permanent differences comprise expenditure that is not deductible for tax purposes or income that is not taxable.
Deferred tax is provided at the rate that is expected to apply when the asset or liability is expected to be settled. On 11 March 2020, the UK
Government announced that it would reverse the previously planned reduction in the corporation tax rate that was due to take effect from
1 April 2020. This change was substantively enacted on 17 March 2020 and we have therefore remeasured our deferred tax assets and
liabilities at 31 March 2020 at the new rate of 19%. This resulted in an exceptional deferred tax charge in the income statement of £91.8 million
and a credit to reserves amounting to £2.7 million.
Other timing differences comprise items other than depreciation of property, plant and equipment where the amount is included in the tax
computation in a different period from when it is recognised in the income statement. Deferred tax is provided on these items.
The amounts included for tax liabilities in the financial statements include estimates and judgments relating to uncertain tax positions. If the
computations subsequently submitted to HMRC include different amounts then these differences are reflected as an adjustment in respect
of prior years in the subsequent financial statements.
Tax (credited)/charged directly to other comprehensive income or equity
c)
In addition to the amount (credited)/charged to the income statement, the following amounts of tax have been (credited)/charged to other
comprehensive income or equity:
Current tax
Tax on share based payments
Tax on pension contributions in prior periods
Total current tax credited to other comprehensive income or equity
Deferred tax
Tax on actuarial gains
Tax on cash flow hedges
Tax on share based payments
Tax on transfers to the income statement
Tax on pension contributions in prior periods
Effect of change in tax rate
Total deferred tax charged to other comprehensive income or equity
14 DIVIDENDS
Amounts recognised as distributions to owners of the Company in the year:
2020
£m
–
(9.5)
(9.5)
32.9
(7.4)
(0.8)
1.6
9.5
(2.7)
33.1
Final dividend for the year ended 31 March 2019 (2018)
Interim dividend for the year ended 31 March 2020 (2019)
Total dividends paid
Pence per share
£m
Pence per share
2020
56.02
40.03
96.05
133.1
95.3
228.4
51.92
37.35
89.27
2019
£m
(0.2)
(9.5)
(9.7)
12.2
(1.5)
–
1.3
9.5
–
21.5
2019
£m
122.9
89.0
211.9
Proposed final dividend for the year ended 31 March 2020
60.05
145.0
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.
157
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information NOTES TO THE GROUP FINANCIAL STATEMENTS
CONTINUED
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. These represent share options granted to employees where the exercise price is less than the average market price of the
Company’s shares during the period.
Basic and diluted earnings per share are calculated on the basis of profit attributable to the owners of the Company.
The calculation of basic and diluted earnings per share is based on the following:
i)
Earnings for the purpose of basic and diluted earnings per share
Profit for the year
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
2020
£m
158.8
2020
m
238.0
1.4
239.4
2020
pence
146.0
145.1
2019
£m
315.3
2019
m
236.3
0.4
236.7
2019
pence
145.8
145.6
Underlying earnings per share figures exclude the effects of deferred tax, exceptional tax, losses/gains on financial instruments, current tax
related to losses/gains on financial instruments, amortisation of acquired intangible assets, exceptional items and current tax related to
exceptional items. The Directors consider that the underlying figures provide a useful additional indicator of performance. The denominators
used in the calculations of underlying 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
Adjustments for:
– exceptional items before tax
– current tax on exceptional items
– amortisation of acquired intangible assets
– net losses/(gains) on financial instruments
– current tax on net losses/gains on financial instruments
– deferred tax
Earnings for the purpose of underlying basic and diluted earnings per share
2020
£m
158.8
51.7
(0.9)
2.1
17.4
(2.6)
120.9
347.4
2019
£m
315.3
9.6
–
0.7
(16.0)
(2.6)
37.6
344.6
158
Severn Trent Plc Annual Report and Accounts 2020 16 GOODWILL
Cost
At 1 April
Acquisition of subsidiary (note 38)
Adjustment to provisional fair values on acquisition (note 38)
At 31 March
2020
£m
90.9
–
0.5
91.4
2019
£m
62.2
28.7
–
90.9
Goodwill is allocated to the Group’s cash-generating units (‘CGUs’) identified according to the operating segment. A summary of the carrying
amount of goodwill by CGU is presented below.
Regulated Water and Waste Water
Business Services
2020
£m
62.2
29.2
91.4
2019
£m
62.2
28.7
90.9
Regulated Water and Waste Water also has an intangible asset with indefinite useful life amounting to £4.3 million (2019: £4.3 million).
a) Regulated Water and Waste Water
On 1 July 2018 the 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 in Hafren Dyfrdwy; consequently this goodwill is allocated
to the Regulated Water and Waste Water CGU.
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, 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 next 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 the cash flows in the projections, which are based on Ofwat’s Final Determination for
AMP7, and the following:
Key assumption
Discount rate
RPI inflation
CPI inflation
Growth rate in the period beyond the detailed projections
The discount rate is an estimate for the weighted average cost of capital at the year end date based on the nominal post-tax WACC detailed
in the Ofwat PR19 Final Determination. The rate disclosed above is the equivalent pre-tax nominal rate.
Inflation has been included in the detailed projections at 2.8% and 1.9% for RPI and CPI respectively based on the Bank of England’s target
rate for CPI.
Cash flows beyond the end of the five-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 £3,965 million. An increase in the discount rate to 6.5% or a
reduction in the growth rate in the period beyond the detailed projections to 0.9% would reduce the recoverable amount to the carrying
amount of the CGU.
%
5.6
2.8
1.9
1.5
159
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information NOTES TO THE GROUP FINANCIAL STATEMENTS
CONTINUED
16 GOODWILL (CONTINUED)
b) Agrivert
On 30 November 2018, the Group acquired Agrivert Holdings and its subsidiary undertakings resulting in goodwill of £28.7 million. Adjustments
to the provisional fair value of the assets and liabilities acquired has increased the goodwill to £29.2 million at 31 March 2020. This goodwill has
been allocated to the Green Power South cash-generating unit which is determined to be the lowest level of independent cash flows relating to
the goodwill. Green Power South 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
Green Power South CGU was determined on the basis of a value in use calculation.
The value in use determined using a discounted cash flow calculation for the Green Power South CGU is based on the most recent financial
projections available for the business to 2025.
The key assumptions underlying these projections are the cash flows in the projections and:
Key assumption
Discount rate
Growth rate in the period beyond the detailed projections
%
6.8
3.0
The discount rate was based on a review of a range of external sources of information about the cost of capital for the Severn Trent energy
business. This rate was then converted to the equivalent pre-tax discount rate disclosed above.
Cash flows beyond the end of the five-year period are extrapolated using an assumed growth of 3.0% in the Group’s free cash flows.
The value in use for the CGU exceeded its carrying value by £152 million. An increase in the discount rate to 12.8% or reduction in the growth
rate in the period beyond the detailed projections to negative 1.4% would reduce the recoverable amount to the carrying amount of the CGU.
17 OTHER INTANGIBLE ASSETS
Cost
At 1 April 2018
Additions
Disposals
Acquisition of subsidiaries
At 1 April 2019
Additions
At 31 March 2020
Amortisation
At 1 April 2018
Amortisation for the year
Disposals
At 1 April 2019
Amortisation for the year
At 31 March 2020
Net book value
At 31 March 2020
At 31 March 2019
Computer software
Internally
generated
£m
Purchased
£m
Capitalised
development
costs and
patents
£m
Other intangible
assets
£m
124.7
12.8
211.7
23.8
(0.3)
–
235.2
44.6
279.8
(173.6)
(14.5)
0.2
(187.9)
(17.4)
11.3
(1.0)
–
135.0
17.9
152.9
(78.7)
(15.3)
0.8
(93.2)
(13.4)
(205.3)
(106.6)
74.5
47.3
46.3
41.8
–
–
–
12.8
–
12.8
(12.8)
–
–
(12.8)
–
(12.8)
–
–
4.3
–
–
31.5
35.8
–
35.8
–
(0.7)
–
(0.7)
(2.1)
(2.8)
33.0
35.1
Total
£m
353.5
35.1
(1.3)
31.5
418.8
62.5
481.3
(265.1)
(30.5)
1.0
(294.6)
(32.9)
(327.5)
153.8
124.2
Other intangible assets includes the Instrument of Appointment acquired with Dee Valley Water and customer contracts and energy subsidy
contracts both acquired with Agrivert.
160
Severn Trent Plc Annual Report and Accounts 2020
Land and
buildings
£m
Infrastructure
assets
£m
Fixed plant and
equipment
£m
Moveable plant
£m
Assets under
construction
£m
Total
£m
18 PROPERTY, PLANT AND EQUIPMENT
Cost
At 1 April 2018
Additions
Transfers on commissioning
Disposals
Acquisition of subsidiary undertaking
At 31 March 2019
3,386.5
5,233.9
4,166.0
77.9
54.4
(0.9)
63.2
146.8
26.5
(0.1)
–
110.3
124.9
(2.4)
6.0
3,581.1
5,407.1
4,404.8
Reclassified on adoption of IFRS 16 (see note 2 a)
–
(129.2)
(381.4)
At 1 April 2019
Additions
Transfers on commissioning
Disposals
At 31 March 2020
Depreciation
At 1 April 2018
Charge for the year
Disposals
At 31 March 2019
3,581.1
5,277.9
4,023.4
90.1
95.1
(12.2)
162.9
56.9
–
170.7
152.0
(5.4)
3,754.1
5,497.7
4,340.7
(1,285.8)
(1,331.9)
(2,694.5)
(85.7)
0.7
(36.8)
(188.4)
–
2.4
(1,370.8)
(1,368.7)
(2,880.5)
Reclassified on adoption of IFRS 16 (see note 2 a)
–
14.4
377.4
55.6
11.5
2.8
(4.0)
0.2
66.1
–
66.1
7.9
1.1
(7.9)
67.2
(36.9)
(4.5)
3.9
(37.5)
–
(37.5)
(5.8)
7.3
–
979.0
514.9
(208.6)
(1.3)
–
13,821.0
861.4
–
(8.7)
69.4
1,284.0
14,743.1
–
(510.6)
1,284.0
14,232.5
524.4
(305.1)
(10.5)
956.0
–
(36.0)
1,492.8
15,152.5
–
–
–
–
–
–
–
–
–
–
(5,349.1)
(315.4)
7.0
(5,657.5)
391.8
(5,265.7)
(327.4)
21.9
(0.5)
(5,571.7)
At 1 April 2019
Charge for the year
Disposals
Impairment
At 31 March 2020
Net book value
At 31 March 2020
At 31 March 2019
(1,370.8)
(1,354.3)
(2,503.1)
(89.7)
9.5
(0.5)
(39.3)
(192.6)
–
–
5.1
–
(1,451.5)
(1,393.6)
(2,690.6)
(36.0)
2,302.6
2,210.3
4,104.1
4,038.4
1,650.1
1,524.3
31.2
28.6
1,492.8
1,284.0
9,580.8
9,085.6
Additions include assets transferred from developers at no cost, which have been recognised at their fair value of £71.0 million
(2019: £42.1 million).
The adjustments to cost and accumulated depreciation arose on the adoption of IFRS 16 and represent the transfer of assets held under finance
leases under IAS 17 to right-of-use assets, which are disclosed separately in note 19 under IFRS 16.
At 31 March 2019 the carrying amount of property, plant and equipment included the following amounts in respect of assets held under finance leases:
Net book value
At 31 March 2019
The net book value of land and buildings is analysed as follows:
Freehold
Short leasehold
Infrastructure
assets
£m
Fixed plant and
equipment
£m
Total
£m
114.8
4.0
118.8
2020
£m
2019
£m
2,302.3
2,210.0
0.3
0.3
2,302.6
2,210.3
161
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NOTES TO THE GROUP FINANCIAL STATEMENTS
CONTINUED
The Group’s leasing activities
19 LEASES
a)
The Group leases various properties, equipment and vehicles. Lease agreements are typically made for fixed periods of up to 999 years but may
have extension options as described in note 2 a).
Lease contracts are negotiated on an individual basis and include a wide range of terms and conditions. The contracts do not include covenants
other than security interests in the leased assets that are held by the lessor and leased assets may not be used as security for other borrowing.
The contracts do not impose any restrictions on dividend payment, additional debt or further leasing. There were no sale and leaseback
transactions in the period.
Income statement
b)
The income statement includes the following amounts relating to leases for the year ended 31 March 2020:
Depreciation charge of right-of-use assets:
Land and buildings
Infrastructure assets
Fixed plant and equipment
Moveable plant
Total depreciation of right-of-use assets
Interest expense included in finance cost
Expense relating to short-term leases included in operating costs
Expense relating to leases of low-value assets included in operating costs
2020
£m
2019
£m
1.4
1.0
3.6
0.6
6.6
4.3
1.1
0.1
–
–
–
–
–
–
–
–
c) Balance sheet
In the previous year the Group only recognised lease assets and lease liabilities in relation to leases that were classified as finance leases under
IAS 17. See note 2 a) for adjustments recognised on adoption of IFRS 16 on 1 April 2019.
The balance sheet includes the following amounts relating to leases:
31 March
2020
£m
10.4
113.8
4.2
0.4
1 April
2019
£m
11.7
114.8
7.8
0.8
128.8
135.1
31 March
2020
£m
5.8
116.9
122.7
1 April
2019
£m
6.0
122.1
128.1
Right-of-use assets:
Land and buildings
Infrastructure assets
Fixed plant and equipment
Moveable plant
Additions to right-of-use assets were £0.3 million.
Lease liabilities:
Current
Non-current
162
Severn Trent Plc Annual Report and Accounts 2020 At 31 March 2019 the Group leased various property plant and equipment with a carrying value of £118.8 million under finance leases expiring
within 1 to 13 years. Finance lease liabilities were reclassified to lease liabilities on 1 April 2019 on the adoption of the new leasing standard –
see note 2 a). Obligations under lease liabilities were 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 were as follows:
Within 1 year
1 – 2 years
2 – 5 years
After more than 5 years
Included in non-current liabilities
2020
£m
10.1
10.0
31.2
112.7
164.0
(41.3)
122.7
2020
£m
5.8
5.7
20.9
90.3
116.9
122.7
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
d) Cash flow
The total cash outflow for leases in the year was £9.8 million which consists of £4.3 million repayments of interest and £5.5 million repayment of
principal elements. This is included in financing cash flows.
INTERESTS IN JOINT VENTURES
20
Particulars of the Group’s principal joint venture undertaking at 31 March 2020 were:
Name
Type
Country of incorporation
Class of share capital held
Proportion of ownership interest
Water Plus Limited
Joint venture
Great Britain
Ordinary B
50%
Water Plus is the largest business retailer in the non-household retail water market in England with close to 1 in 3 businesses in England
as customers. Its principal activities are core retail services including billing, meter reading, call centre support and water efficiency advice
as well as key account management services and value added solutions.
Water Plus competes in England and Scotland for customers ranging from small and medium-sized enterprises through to large corporate
entities in both the private and public sectors.
Movements in our investment were as follows:
Carrying value of joint venture investment at 1 April
Amortisation of discount on zero coupon loan note
Zero coupon loan note classified as part of net investment
Group's share of loss after tax and comprehensive loss
As at 31 March
2020
£m
37.0
–
9.8
(46.8)
–
2019
£m
37.6
(0.2)
–
(0.4)
37.0
In common with other participants in the non-household retail market, Water Plus has been significantly impacted by the COVID-19 outbreak;
the resulting lockdown; and its effects on commercial customers and expects to see lower economic activity leading to increases in business
customer failures.
Water Plus has updated its business plan to take account of the expected impacts of the COVID-19 outbreak, and the impairment assessment for
its long-term assets, in particular goodwill and customer relationships recognised under the acquisition accounting rules of IFRS 3. The updated
impairment tests identified an impairment of £51.1 million against these assets. In addition, Water Plus has already seen a significant reduction
in cash collected from its non-household customers and, using economic forecasts to estimate the likely impact of future economic
circumstances on their debt book at 31 March, has recognised an additional £29.3 million bad debt provision.
163
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information NOTES TO THE GROUP FINANCIAL STATEMENTS
CONTINUED
INTERESTS IN JOINT VENTURES (CONTINUED)
20
Before taking account of these COVID-19 related write-downs, our share of Water Plus’s loss for the year was £14.3 million, of which £9.3 million
arose in the first half of the year.
We have recognised £46.8 million of our share of losses in Water Plus. Losses recognised have been capped at the level of our long-term
investments in Water Plus. Unrecognised losses at 31 March 2020 were £4.9 million.
All results are from continuing operations in both the current and preceding year.
As at 31 March 2020 and 2019 the joint venture did not have any significant contingent liabilities to which the Group was exposed and, other
than those 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 2020 or 2019.
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 £54.1 million
(2019: £58.1 million) and the guarantees for the Severn Trent Water loan is for the amount due.
The registered office of Water Plus Limited is Two Smithfield, Leonard Coates Way, Stoke-On-Trent, ST1 4FD.
At 31 March 2020, Water Plus had current assets of £310.8 million, non-current assets of £33.3 million, current liabilities of £154.5 million and
non-current liabilities of £218.1 million. Included in these amounts were cash of £7.6 million, current financial liabilities (excluding trade and
other payables and provisions) of £0.6 million and non-current financial liabilities of £216.6 million.
Its revenue for the year then ended was £854.5 million and it recorded a loss for the year and total comprehensive loss of £99.1 million after
depreciation and amortisation of £56.4 million, finance income of £3.2 million, finance costs of £8.2 million and a tax credit of £8.7 million.
21 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
Trade receivables
Accrued income
Other amounts receivable
Loans 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
Loans receivable from joint venture
Current assets
Derivative financial assets
Trade and other receivables
Cash and cash equivalents
164
Note
22
22
22
22
23
23
2020
£m
36.7
4.9
41.6
23.7
0.2
23.9
65.5
220.1
241.8
58.0
92.6
11.3
37.3
661.1
726.6
65.5
11.1
92.6
169.2
–
508.8
48.6
557.4
726.6
2019
£m
18.0
26.1
44.1
19.1
5.3
24.4
68.5
221.5
223.3
64.6
142.0
–
41.0
692.4
760.9
68.4
15.7
142.0
226.1
0.1
493.7
41.0
534.8
760.9
Severn Trent Plc Annual Report and Accounts 2020
22 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
Loans receivable from joint venture
2020
£m
220.1
46.9
0.7
16.0
241.8
525.5
11.1
14.1
35.9
92.6
153.7
679.2
2019
£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
The carrying values of trade and other receivables are reasonable approximations of their fair values.
Trade receivables and accrued income
a) Credit risk
(i)
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 91% of Group turnover and 92% 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.
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 43, Related party
transactions. Credit risk is considered separately for trade receivables due from Water Plus and is considered immaterial as amounts
outstanding are paid within 30 days.
The Group applies the IFRS 9 simplified approach to measuring expected credit losses, which uses a lifetime expected credit loss allowance
for all trade receivables, contract assets and accrued income.
A collective provision is recorded for expected credit losses against assets for which no specific provision has been made. Expected credit
losses for trade receivables are based on the historical credit losses experienced over the last nine years and reasonable supportable
information on the future impact of the COVID-19 outbreak on unemployment levels and hence on the Group’s collection of trade receivables.
Debts are written off when there is no realistic expectation of further collection and enforcement activity has ceased. There were no amounts
outstanding on receivables written off and still subject to enforcement activity (2019: nil).
(ii) Contract assets
The contract assets represent the Group’s right to receive consideration from the Ministry of Defence for services provided. On that basis the
Group considers that the credit risk in relation to these assets is immaterial and therefore no provision for expected credit losses has been
recognised (2019: nil).
(iii) Loans receivable from joint venture
As well as trade receivables from Water Plus the Group has advanced loans to its joint venture. These loans are assessed for impairment
under the two stage impairment model in IFRS 9.
In the current year, the Group determined that there has been a significant increase in the credit risk since inception relating to its loans
receivable from Water Plus of £97.5 million (2019: £142.0 million) in the light of the unforeseen significant increase in losses incurred by
Water Plus in the year. The Group has therefore assessed the lifetime expected credit loss of its loans to Water Plus at 31 March 2020
(2019: 12 month expected credit loss) based on Water Plus’s financial projections, taking into account the expected impact of COVID-19
in more than one scenario, as this is considered to be reasonable and supportable forward-looking information. The Group has recorded
an impairment provision for expected credit losses of £4.9 million (2019: no provision recognised as risk of default was insignificant) resulting
in a net loan receivable of £92.6 million (2019: £142.0 million).
165
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information NOTES TO THE GROUP FINANCIAL STATEMENTS
CONTINUED
Expected credit loss allowance – trade receivables and accrued income
22 TRADE AND OTHER RECEIVABLES (CONTINUED)
b)
The expected credit loss at 31 March 2020 and 2019 was as set out below. The expected loss rate disclosed is calculated as the expected loss
on the total amount originally billed for each age category.
Expected
loss rate
%
Gross carrying
amount
£m
Loss
allowance
£m
Net carrying
amount
£m
8
33
42
47
48
61
64
48
46
50
100
349.8
60.0
67.4
43.5
30.4
22.3
15.7
8.3
4.1
1.0
1.1
(27.4)
(19.7)
(28.4)
(20.3)
(14.6)
(13.7)
(10.1)
(4.0)
(1.9)
(0.5)
(1.1)
322.4
40.3
39.0
23.2
15.8
8.6
5.6
4.3
2.2
0.5
–
603.6
(141.7)
461.9
Expected loss
rate
%
Gross carrying
amount
£m
Loss
allowance
£m
Net carrying
amount
£m
12
40
30
30
32
32
23
54
28
64
60
326.3
54.9
57.9
38.7
27.9
19.7
20.2
11.1
5.4
1.4
1.5
(39.8)
(22.1)
(17.3)
(11.6)
(9.0)
(6.4)
(4.7)
(6.0)
(1.5)
(0.9)
(0.9)
286.5
32.8
40.6
27.1
18.9
13.3
15.5
5.1
3.9
0.5
0.6
565.0
(120.2)
444.8
2020
£m
120.2
42.9
(21.4)
141.7
2019
£m
129.0
25.6
(34.4)
120.2
2020
Not past due
Up to 1 year past due
1 – 2 years past due
2 – 3 years past due
3 – 4 years past due
4 – 5 years past due
5 – 6 years past due
6 – 7 years past due
7 – 8 years past due
8 – 9 years past due
More than 9 years past due
2019
Not past due
Up to 1 year past due
1 – 2 years past due
2 – 3 years past due
3 – 4 years past due
4 – 5 years past due
5 – 6 years past due
6 – 7 years past due
7 – 8 years past due
8 – 9 years past due
More than 9 years past due
Movements on the expected credit loss allowance were as follows:
At 1 April
Charge for bad and doubtful debts
Amounts written off during the year
At 31 March
166
Severn Trent Plc Annual Report and Accounts 2020 23 CASH AND CASH EQUIVALENTS
Cash at bank and in hand
Short-term deposits
2020
£m
37.3
11.3
48.6
2019
£m
41.0
–
41.0
Included within short-term bank deposits are security deposits for insurance obligations of £4.3 million, which are not available for use by the
Group. In addition, £17.5 million (2019: £14.7 million) of cash at bank and in hand is restricted for use on the Ministry of Defence contract and is
not available for use by the Group.
24 BORROWINGS
Current liabilities
Bank overdraft
Bank loans
Other loans
Lease liabilities
Non-current liabilities
Bank loans
Other loans
Lease liabilities
See note 35 for details of interest rates payable and maturity of borrowings.
2020
£m
–
469.5
0.1
5.8
2019
£m
1.4
188.7
2.8
4.1
475.4
197.0
782.4
5,058.4
116.9
5,957.7
6,433.1
931.4
4,817.7
108.1
5,857.2
6,054.2
167
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information NOTES TO THE GROUP FINANCIAL STATEMENTS
CONTINUED
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
Borrowings
Other payables
Current liabilities
Derivative financial 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
168
Note
24
26
26
2020
£m
78.5
27.7
106.2
50.2
7.2
57.4
163.6
2019
£m
94.1
6.2
100.3
25.8
0.4
26.2
126.5
6,433.1
6,054.2
45.4
23.1
6,501.6
6,665.2
159.2
5,957.7
6.5
32.2
29.9
6,116.3
6,242.8
126.5
5,857.2
8.4
6,123.4
5,992.1
4.4
475.4
45.4
16.6
541.8
–
197.0
32.2
21.5
250.7
6,665.2
6,242.8
2020
£m
45.4
7.7
16.6
487.6
16.3
573.6
6.5
8.8
1,172.0
1,187.3
1,760.9
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
Severn Trent Plc Annual Report and Accounts 2020 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 2018
Charge/(credit) to income
Acquisition of subsidiary undertaking
Charge/(credit) to equity arising from rate change
At 31 March 2019
Adjustment on adoption of IFRS 16 (see note 2 a)
At 1 April 2019
Charge/(credit) to income
Charge/(credit) to income arising from rate change
Charge/(credit) to equity
Credit to equity arising from rate change
At 31 March 2020
Accelerated tax
depreciation
£m
Retirement
benefit
obligations
£m
Fair value of
financial
instruments
£m
783.5
36.3
3.8
–
823.6
–
823.6
29.8
96.9
–
–
950.3
(62.1)
(2.3)
–
21.7
(42.7)
–
(42.7)
1.3
(1.6)
42.4
(2.3)
(2.9)
(42.1)
5.2
–
(0.2)
(37.1)
–
(37.1)
(1.0)
(4.0)
(5.8)
(0.4)
(48.3)
Other
£m
(4.1)
(1.6)
9.4
–
3.7
(0.4)
3.3
(1.0)
0.5
(0.8)
–
2.0
Total
£m
675.2
37.6
13.2
21.5
747.5
(0.4)
747.1
29.1
91.8
35.8
(2.7)
901.1
The majority of the Group’s deferred tax liability is expected to be recovered over more than one year. Deferred tax assets and liabilities have
been offset. The offset amounts, which are expected to be recovered/settled after more than 12 months, are as follows:
Deferred tax asset
Deferred tax liability
2020
£m
(51.2)
952.3
901.1
2019
£m
(79.8)
827.3
747.5
28 RETIREMENT BENEFIT SCHEMES
a) Defined benefit pension schemes
(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 (the ‘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’)
* 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.
Date of last formal actuarial valuation
31 March 2019
31 March 2019
31 March 2017
169
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information
NOTES TO THE GROUP FINANCIAL STATEMENTS
CONTINUED
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
Retirement benefit obligation – deficit total
Net retirement benefit obligation
STPS, STMIPS and DVWS
Fair value of scheme assets
Equities
Corporate bonds
Liability-driven investment funds (‘LDIs’)
Property
High-yield bonds
Cash
2020
£m
2019
£m
2,414.1
2,418.9
(2,648.1)
(2,871.8)
(234.0)
(452.9)
21.3
(247.4)
(7.9)
(255.3)
(234.0)
2020
£m
275.6
925.7
720.4
261.9
28.2
202.3
18.6
(462.9)
(8.6)
(471.5)
(452.9)
2019
£m
356.6
899.2
746.0
228.2
31.3
157.6
2,414.1
2,418.9
Most of the assets have quoted prices in active markets, but there are equities, corporate bonds and LDI investments which are unquoted
amounting to £414.1 million. Due to the unprecedented market situation related to COVID-19, valuation of the asset categories requiring
judgment (in particular, property included at £261.9 million) is subject to significant uncertainty at the balance sheet date. Consequently,
a higher degree of caution should be attached to the valuation of those assets than would normally be the case.
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
2020
£m
2019
£m
2,418.9
2,339.8
58.2
46.2
0.1
(0.4)
(3.4)
(105.5)
61.0
34.9
0.1
95.9
(2.3)
(110.5)
2,414.1
2,418.9
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Severn Trent Plc Annual Report and Accounts 2020 Movements in the present value of the defined benefit obligations were as follows:
Present value at 1 April
Service cost
Exceptional past service cost
Interest cost
Contributions from scheme members
Actuarial (losses)/gains arising from changes in demographic assumptions
Actuarial gains/(losses) arising from changes in financial assumptions
Actuarial gains arising from experience adjustments
Benefits paid
Present value at 31 March
2020
£m
2019
£m
(2,871.8)
(2,859.6)
(0.2)
–
(69.3)
(0.1)
(49.0)
222.5
14.3
105.5
(0.2)
(9.6)
(74.8)
(0.1)
55.7
(132.7)
39.0
110.5
(2,648.1)
(2,871.8)
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 £7.9 million (2019: £8.6 million) is included as an unfunded scheme
within the retirement benefit obligation.
The Group has assessed that it 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 to operating costs:
Current service cost
Exceptional past service cost
Scheme administration costs
Amounts charged to finance costs:
Interest cost
Amounts credited to finance income:
Interest income on scheme assets
Total amount charged to the income statement
The actual return on scheme assets was a gain of £57.8 million (2019: £156.9 million).
Actuarial gains and losses have been reported in the statement of comprehensive income.
2020
£m
(0.2)
–
(3.4)
(3.6)
2019
£m
(0.2)
(9.6)
(2.3)
(12.1)
(69.3)
(74.8)
58.2
(14.7)
61.0
(25.9)
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. There have been no significant
developments that have changed the initial estimate in the current year. Any subsequent changes to the estimate of the cost of equalising
benefits in future periods will be treated as a change in actuarial assumption, and 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 Scheme’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 Scheme. 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 Schemes have a balanced approach to investment in equity securities, debt instruments and real estate. Due to the long-term
nature of the Scheme liabilities, we consider it appropriate to invest a portion of the Scheme assets in equity securities and in real estate to
leverage the return generated by the fund.
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CONTINUED
28 RETIREMENT BENEFIT SCHEMES (CONTINUED)
a) Defined benefit pension schemes (continued)
(iv) Actuarial risk factors (continued)
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.
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
2020
% p.a.
2.5
1.7
2.4
2.5
2.5
2019
% p.a.
3.2
2.2
2.5
3.2
3.2
The assumption for RPI 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 taking account of the 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
Long-term rate of 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
2020
Women
Men
2019
Women
S3PA_L
S3PA_M
S2NMA
S2NFA
112%
95%
95%
99%
CMI 2019
CMI 2019
CMI 2018
CMI 2018
1.0%
22.2
23.1
1.0%
23.9
25.1
1.0%
21.9
22.9
1.0%
23.6
24.8
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
Impact on disclosed obligations
Increase/decrease by 0.1% p.a.
Decrease/increase by £41/£42 million
Increase/decrease by 0.1% p.a.
Increase/decrease by £36/£35 million
Increase in life expectancy by 1 year
Increase by £97 million
1 A change in discount rate is likely to occur as a result of changes in bond yields 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 Schemes.
2 The projected impact resulting from a change in RPI reflects the underlying effect on pensions in payment, pensions in deferment and resultant pension increases.
3 The change in this assumption is based on triennial valuations and reflect the fact that life expectancy rates might increase.
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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.
(vi) 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 (2019: 16 years) and 14 years for DVWS
(2019: 15 years).
The most recent completed formal triennial actuarial valuations and funding agreements were carried out as at 31 March 2019 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 £32.4 million, increasing in line with CPI inflation until 31 March 2027, were agreed. Payments of £8.2 million per annum through an asset
backed funding arrangement will continue to 31 March 2032. Further inflation linked payments of £15.0 million per annum are being made
through an additional asset backed funding arrangement, with payments having started in the financial year ended 31 March 2018 and
continuing to 31 March 2031. These contributions will cease earlier should a subsequent valuation of 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 £25.6 million (2019: £23.4 million) represents contributions payable to these schemes by the Group
at rates specified in the rules of the Scheme. As at 31 March 2020, no contributions (2019: nil) in respect of the current reporting period were
owed to the Schemes.
Hafren Dyfrdwy operates two defined contribution pension schemes, neither of which was material in either the current or prior year.
29 PROVISIONS
At 31 March 2019
Recognised on adoption of IFRS 16 (see note 2 a)
At 1 April 2019
(Credited)/charged to income statement
Utilisation of provision
Unwinding of discount
Reclassifications
At 31 March 2020
Included in:
Current liabilities
Non-current liabilities
Restructuring
£m
Insurance
£m
0.3
–
0.3
–
(0.3)
–
–
–
23.4
–
23.4
(1.4)
(3.0)
–
2.5
21.5
Other
£m
27.7
2.4
30.1
4.5
(9.8)
0.2
(2.5)
22.5
2020
£m
18.9
25.1
44.0
Total
£m
51.4
2.4
53.8
3.1
(13.1)
0.2
–
44.0
2019
£m
32.2
19.2
51.4
Insurance includes provisions in respect of Lyra Insurance Guernsey Limited, a captive insurance company and a wholly owned subsidiary
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 10 years from the balance sheet date.
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CONTINUED
30 SHARE CAPITAL
Total issued and fully paid share capital
241,537,324 Ordinary Shares of 97 17/19 pence (2019: 240,943,929)
2020
£m
2019
£m
236.5
235.9
At 31 March 2020, 3,581,338 treasury shares (2019: 3,774,921) were held at a nominal value of £3.5 million (2019: £3.7 million).
Changes in share capital were as follows:
Ordinary Shares of 97 17/19 pence
At 1 April 2018
Shares issued under the Employee Sharesave Scheme
At 1 April 2019
Shares issued under the Employee Sharesave Scheme
At 31 March 2020
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 2018
Total comprehensive income for the year
At 1 April 2019
Total comprehensive income for the year
At 31 March 2020
Number
£m
240,222,617
721,312
240,943,929
593,395
241,537,324
2020
£m
128.0
9.0
137.0
Hedging
reserve
£m
(64.1)
(0.2)
(64.3)
(24.9)
(89.2)
235.1
0.8
235.9
0.6
236.5
2019
£m
117.7
10.3
128.0
Total
£m
93.0
(0.2)
92.8
(24.9)
67.9
Capital
redemption
reserve
£m
157.1
–
157.1
–
157.1
The capital redemption reserve arose on the redemption of B shares.
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.
174
Severn Trent Plc Annual Report and Accounts 2020 33 CAPITAL MANAGEMENT
The Group’s principal objectives in managing capital are:
– to maintain a flexible and sustainable balance sheet structure;
– to maintain an investment-grade credit rating;
– 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; and
– to provide the Group with an appropriate degree of certainty as to its foreign exchange exposure.
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 monitor market conditions and reduce its exposure to low floating interest rates, which comprises 12% (2019: 22%)
of our gross debt portfolio at the balance sheet date, with a further 24% (2019: 25%) of index-linked debt and 64% (2019: 53%) of fixed rate debt.
Exposure to credit risk (excluding credit risk relating to amounts receivable from contracts with customers) is set out in note 35 b).
Foreign exchange risk is set out in note 35 a) (ii). At 31 March 2020 the Group had the following credit ratings:
Severn Trent Plc
Severn Trent Water
The ratings were stable.
Moody’s
Baa2
Baa1
Standard and Poor’s
BBB
BBB+
A key metric in measuring financial sustainability and capital efficiency for companies in the water sector is RCV gearing. This is measured
as net debt divided by Regulatory Capital Value (RCV). The Group aims to main its RCV gearing ratio close to the Ofwat assumption at the Price
Review (62.5% for AMP 6 and 60% for AMP 7). At 31 March 2020 the Group’s RCV gearing ratio was 64.9% (2019: 63.0%) and for Severn Trent
Water it was 64.4% (2019: 62.3%).
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 2019/20 dividend at 100.08 pence, an increase of 7.2%
compared with the total dividend for 2018/19 of 93.37 pence. Our policy is to grow the dividend annually at no less than CPIH until March 2025.
The Group’s capital at 31 March was:
Net cash and cash equivalents
Bank loans
Other loans
Lease liabilities
Cross currency swaps
Loans receivable from joint venture
Net debt
Equity attributable to owners of the Company
Total capital
2020
£m
48.6
2019
£m
39.6
(1,251.9)
(1,120.1)
(5,058.5)
(4,820.5)
(122.7)
60.4
92.6
(112.2)
37.1
142.0
(6,231.5)
(5,834.1)
(1,243.7)
(1,164.1)
(7,475.2)
(6,998.2)
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CONTINUED
Fair value measurements
34 FAIR VALUES OF FINANCIAL INSTRUMENTS
a)
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 are Level 2 unless otherwise stated below:
Cross currency swaps
Assets
Interest rate swaps
Assets
Liabilities
Energy swaps
Assets
Liabilities
Inflation swaps
Liabilities
2020
£m
2019
£m Valuation techniques and key inputs
60.4
37.1
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. The currency cash flows are translated at spot rate.
4.9
(128.7)
26.1
(119.9)
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.
0.2
(7.2)
5.3
(0.4)
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.
(27.7)
(6.2)
Discounted cash flow.
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 (‘the wedge’).
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)
(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 2018
Losses recognised in profit or loss
Recognised on acquisition of subsidiary
At 31 March 2019
Losses recognised in profit or loss
At 31 March 2020
Inflation
swaps
£m
Contingent
consideration
£m
(2.8)
(3.4)
–
(6.2)
(21.5)
(27.7)
–
–
(3.0)
(3.0)
–
(3.0)
These Level 3 instruments are valued using unobservable inputs. In valuing the inflation swaps, we have identified the unobservable input as
the CPI wedge. A reduction of 10bps in the CPI wedge would result in an increase in the carrying value of £7.9 million and an increase of 10bps
in the CPI wedge would result in a decrease in the carrying value of £7.9 million. This sensitivity is assuming no change to any other inputs.
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Severn Trent Plc Annual Report and Accounts 2020
b) Comparison of fair value of financial instruments with their carrying amounts
The Directors consider that the carrying amounts of all financial instruments, except those disclosed in the table below, approximate to their fair
values. The carrying values and estimated fair values of other financial instruments are set out below:
Floating rate debt
Bank loans
Other loans
Fixed rate debt
Bank loans
Other loans
Finance leases
Lease liabilities
Index-linked debt
Bank loans
Other loans
Carrying value
£m
2020
Fair value
£m
Carrying value
£m
948.9
187.2
947.1
180.9
818.1
185.6
2019
Fair value
£m
818.3
185.9
1,136.1
1,128.0
1,003.7
1,004.2
182.2
182.1
3,472.8
3,903.1
–
122.7
–
129.5
184.1
3,267.2
112.2
–
183.3
3,667.0
119.6
–
3,777.7
4,214.7
3,563.5
3,969.9
120.8
1,398.5
1,519.3
6,433.1
138.0
1,904.2
2,042.2
7,384.9
117.9
1,367.7
1,485.6
6,052.8
126.7
2,171.6
2,298.3
7,272.4
The above classification does not take into account the impact of unhedged interest rate swaps or cross currency swaps.
Fixed rate loans are valued using market prices for similar instruments, which is a Level 2 valuation technique.
Index-linked loans are rarely traded and therefore quoted prices are not considered a reliable indicator of fair value. Therefore, these loans are
valued using discounted cash flow models with discount rates derived from observed market prices for a sample of bonds, which is a Level 2
valuation technique.
Fair values of the other debt instruments are also calculated using discounted cash flow models with discount rates derived from observed
market prices, which is a Level 2 valuation technique.
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 of Directors. 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 operates under the Group’s Treasury Procedures Manual and Policy Statement and 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 CPI. In order to mitigate the risks to cash flow and earnings arising from fluctuations in CPI, the Group holds debt instruments
where the principal repayable and interest cost is linked to RPI and the Group holds RPI/CPI swaps to mitigate the risk of divergence between
RPI and CPI inflation.
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CONTINUED
35 RISKS ARISING FROM FINANCIAL INSTRUMENTS (CONTINUED)
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.
Interest rate risk
(i)
The Group’s annual 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.
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 39)
Cash and cash equivalents
Loans receivable from joint venture
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
2020
£m
2019
£m
6,231.5
5,834.1
48.6
92.6
60.4
(29.3)
(23.1)
41.0
142.0
37.1
(28.8)
(16.7)
6,380.7
6,008.7
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.
2020
Bank loans
Other loans
Lease liabilities
Floating rate
£m
Fixed rate
£m
Index-linked
£m
Total
£m
(948.9)
(187.2)
(182.2)
(120.8)
(1,251.9)
(3,420.4)
(1,398.5)
(5,006.1)
–
(122.7)
–
(122.7)
(1,136.1)
(3,725.3)
(1,519.3)
(6,380.7)
Impact of swaps not matched against specific debt instruments
126.6
(126.6)
–
–
Interest-bearing financial liabilities
(1,009.5)
(3,851.9)
(1,519.3)
(6,380.7)
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)
60%
4.07%
8.6
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Severn Trent Plc Annual Report and Accounts 2020 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)
Floating rate
£m
Fixed rate
£m
Index-linked
£m
Total
£m
(1.4)
(1.4)
(818.1)
(169.1)
–
–
(184.1)
(117.9)
(1,120.1)
(3,238.3)
(1,367.6)
(4,775.0)
–
(112.2)
–
(112.2)
(988.6)
(348.4)
(3,534.6)
(1,485.5)
(6,008.7)
348.4
–
–
(1,337.0)
(3,186.2)
(1,485.5)
(6,008.7)
53%
4.19%
8.8
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 charge of
£7.0 million (2019: credit of £19.7 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
2020
%
5.10
–
5.46
5.20
–
2.75
2.75
2019
%
4.98
5.14
5.45
5.13
3.36
2.75
2.97
Notional principal amount
2020
£m
2019
£m
(200.0)
–
(75.0)
(275.0)
–
50.0
50.0
(225.0)
(150.0)
(150.0)
(75.0)
(375.0)
225.0
400.0
625.0
250.0
2020
£m
(41.4)
–
(37.1)
(78.5)
–
4.9
4.9
Fair value
2019
£m
(25.8)
(34.9)
(33.4)
(94.1)
15.8
10.3
26.1
(73.6)
(68.0)
In addition to the above the Group has cross currency swaps that also swap fixed rate interest to floating (see below).
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
6.2
(7.8)
6.2
2020
-1.0%
£m
(7.0)
7.8
(7.0)
1.0%
£m
(48.5)
(10.8)
(48.5)
2019
-1.0%
£m
54.3
10.8
54.3
(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 no charge (2019: 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 value and fair value of these swaps is shown in note 36 a) (i).
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NOTES TO THE GROUP FINANCIAL STATEMENTS
CONTINUED
35 RISKS ARISING FROM FINANCIAL INSTRUMENTS (CONTINUED)
a) Market risk (continued)
(ii) Exchange rate risk (continued)
The Group also has cross currency swaps with a sterling notional value of £98.3 million (2019: £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
and also swap the interest from fixed rate to floating, but they are not designated hedges under IFRS 9. This has led to a credit of £18.6 million
(2019: £12.2 million) in the income statement, which is partly offset by the exchange loss of £5.6 million (2019: £8.6 million) on the underlying debt.
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.
2020
Borrowings by currency
Cross currency swaps – hedge accounted
Cross currency swaps – not hedge accounted
Net currency exposure
2019
Borrowings by currency
Cross currency swaps – hedge accounted
Cross currency swaps – not hedge accounted
Net currency exposure
Euro
€m
(19.9)
19.9
–
–
Euro
€m
(20.1)
19.9
–
(0.2)
US dollar
$m
(180.0)
30.0
150.0
–
US dollar
$m
(180.0)
30.0
150.0
–
Yen
¥bn
(2.0)
2.0
–
–
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 22.
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:
Credit limit
Amount deposited
Double A range
Single A range
Below single A range
Values of derivative assets analysed by credit ratings of counterparties were as follows:
Double A range
Single A range
Below single A range
2020
£m
15.0
800.0
–
815.0
2019
£m
105.0
700.0
–
805.0
2020
£m
–
11.3
–
11.3
2020
£m
4.9
60.6
–
65.5
2019
£m
–
–
–
–
Derivative assets
2019
£m
1.4
67.1
–
68.5
The Group’s maximum exposure to credit risk is the carrying amount of financial assets detailed in note 21, which is net of impairment losses.
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Severn Trent Plc Annual Report and Accounts 2020
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
2020
£m
755.0
2019
£m
885.0
(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.
2020
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
Fixed rate
£m
Index-linked
£m
Trade and other
payables
£m
Payments on
financial
liabilities
£m
(330.1)
(10.8)
(662.6)
(128.2)
(49.0)
–
–
–
–
–
–
–
(287.8)
(383.2)
(918.6)
(1,936.5)
(752.3)
(309.9)
(487.5)
–
–
–
–
–
(27.6)
(28.3)
(226.8)
(510.3)
(213.0)
(146.5)
(177.4)
(210.6)
(642.8)
(3,181.2)
(21.6)
(280.3)
(62.0)
(6.5)
–
–
–
–
–
–
–
–
–
–
(707.5)
(428.8)
(1,808.0)
(2,575.0)
(1,014.3)
(456.4)
(664.9)
(210.6)
(642.8)
(3,181.2)
(21.6)
(280.3)
(1,180.7)
(5,075.8)
(5,666.4)
(68.5)
(11,991.4)
Loans due from
joint ventures
£m
Trade and other
receivables
£m
2.9
99.4
102.3
508.8
11.1
519.9
Cash and
short-term
deposits
£m
Receipts from
financial assets
£m
48.6
–
48.6
560.3
110.5
670.8
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CONTINUED
35 RISKS ARISING FROM FINANCIAL INSTRUMENTS (CONTINUED)
c) Liquidity risk (continued)
(ii) Cash flows from non-derivative financial instruments (continued)
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
Fixed rate
£m
Index-linked
£m
Trade and other
payables
£m
Payments on
financial
liabilities
£m
(202.2)
(14.4)
(352.3)
(469.2)
(50.8)
–
–
–
–
–
–
–
(122.8)
(276.4)
(1,165.6)
(1,359.6)
(1,206.0)
(246.1)
(413.4)
–
–
–
–
–
(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)
(53.7)
(8.4)
–
–
–
–
–
–
–
–
–
–
(407.5)
(330.1)
(1,839.5)
(2,241.1)
(1,474.7)
(391.7)
(589.7)
(208.5)
(652.7)
(3,248.6)
(22.8)
(358.6)
(1,088.9)
(4,789.9)
(5,824.6)
(62.1)
(11,765.5)
Loans due from
joint ventures
£m
Trade and other
receivables
£m
2.5
144.6
147.1
493.7
15.7
509.4
Cash and
short-term
deposits
£m
Receipts from
financial assets
£m
41.0
–
41.0
537.2
160.3
697.5
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.
(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.
Derivative liabilities
Derivative assets
Cross currency swaps
Interest rate
swaps
£m
Inflation swaps
£m
Energy swaps
£m
Interest rate
swaps
£m
Energy swaps
£m
Cash receipts
£m
Cash payments
£m
(16.2)
(20.1)
(54.1)
(39.8)
(5.7)
–
(135.9)
–
0.1
0.6
(2.8)
2.3
(28.7)
(28.5)
(2.8)
(2.6)
(1.9)
–
–
–
(7.3)
0.3
0.5
1.5
2.1
0.8
–
5.2
–
–
0.2
–
–
–
6.6
6.6
19.9
(2.8)
(2.6)
(8.1)
196.0
(148.6)
–
–
–
–
0.2
229.1
(162.1)
Total
£m
(14.9)
(18.1)
(41.9)
6.9
(2.6)
(28.7)
(99.3)
2020
Within 1 year
1 – 2 years
2 – 5 years
5 – 10 years
10 – 15 years
15 – 20 years
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Severn Trent Plc Annual Report and Accounts 2020 2019
Within 1 year
1 – 2 years
2 – 5 years
5 – 10 years
10 – 15 years
15 – 20 years
Derivative liabilities
Derivative assets
Cross currency swaps
Interest rate
swaps
£m
Inflation swaps
£m
Energy swaps
£m
Interest rate
swaps
£m
Energy swaps
£m
Cash receipts
£m
Cash payments
£m
(28.6)
(15.6)
(44.9)
(31.8)
(7.5)
–
(128.4)
–
–
(0.3)
(1.7)
(2.5)
10.4
5.9
–
–
(0.4)
–
–
–
(0.4)
16.7
0.3
0.6
0.4
(0.1)
–
17.9
0.1
0.6
4.7
–
–
–
5.4
6.2
6.2
18.3
164.7
16.9
–
212.3
(3.2)
(3.2)
(9.7)
(144.1)
(8.6)
–
(168.8)
Total
£m
(8.8)
(11.7)
(31.7)
(12.5)
(1.8)
10.4
(56.1)
Inflation risk
d)
The Group’s principal operating subsidiary, Severn Trent Water, operates under a regulatory environment where its prices are linked to inflation
(for the period to 31 March 2020 as measured by RPI). Its operating profits and cash flows are therefore exposed to changes in inflation. 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 inflation 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 the measure of inflation used in the economic regulatory model from RPI to CPIH over a period of time.
In anticipation of this the Group has entered into CPI/RPI swaps with a notional value of £350 million (2019: £250 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 CPI/RPI rather than interest rates. The sensitivity at
31 March of the Group’s profit and equity to changes in CPI/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
(12.3)
(12.3)
2020
-1.0%
£m
12.3
12.3
+1.0%
£m
(10.6)
(10.6)
2019
-1.0%
£m
10.6
10.6
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. Hedge ineffectiveness arises from credit risk, which is not hedged.
Fair value hedges
a)
(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:
Notional principal amount
Fair value
Euro
US dollar
Yen
2020
£m
11.4
23.2
8.5
43.1
2019
£m
11.4
23.2
8.5
43.1
2020
£m
10.1
3.4
10.2
23.7
2019
£m
10.1
0.2
8.8
19.1
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NOTES TO THE GROUP FINANCIAL STATEMENTS
CONTINUED
Interest rate swaps
36 HEDGE ACCOUNTING (CONTINUED)
b) Cash flow hedges
(i)
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
Notional principal amount
Fair value
2020
%
2.57
1.83
2.06
2019
%
2.63
1.83
2.08
2020
£m
132.2
298.0
430.2
2019
£m
135.2
298.0
433.2
2020
£m
(15.3)
(34.9)
(50.2)
2019
£m
(10.9)
(14.9)
(25.8)
The Group recognised a gain on hedge ineffectiveness of £2.7 million (2019: £1.9 million) in losses/gains on financial instruments in the income
statement in relation to interest rate swaps.
(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
Average contract price
Notional contracted amount
Fair value
2020
£/MWh
44.7
43.1
44.6
–
44.2
2019
£/MWh
48.6
44.7
43.7
47.7
2020
MWh
372,240
372,240
459,720
–
2019
MWh
21,955
372,240
788,280
43,680
44.2
1,204,200
1,226,155
2020
£m
(4.4)
(1.6)
(1.0)
–
(7.0)
2019
£m
0.1
2.0
2.7
0.1
4.9
At the year end the cumulative fair value adjustments arising from the corresponding continuing hedge relationships were as follows:
2020
Cross currency swaps
Interest rate swaps
2019
Cross currency swaps
Interest rate swaps
Carrying amount of
hedged items
Cumulative amount of fair value
adjustments on the hedged items
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
–
–
–
(65.4)
(180.0)
245.4
–
–
–
(19.5)
–
(19.5)
Carrying amount of
hedged items
Cumulative amount of fair value
adjustments on the hedged items
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
–
–
–
(60.9)
(181.9)
(242.8)
–
–
–
(17.9)
–
(17.9)
£65.4 million (2019: £60.9 million) of the carrying amount of hedged items and £19.5 million (2019: £17.9 million) of the cumulative amount of fair
value adjustments on the hedged items relates to fair value hedges. The remainder relates to cash flow hedges.
Amendments to IFRS 9
From 1 April 2019, the Group has early adopted the amendments to IFRS 7 and IFRS 9 introduced to provide temporary relief from applying specific
hedge accounting requirements to hedging relationships directly affected by the planned replacement of benchmark interest rates such as LIBOR.
The Group is exposed to GBP LIBOR, which is subject to interest rate benchmark reform within its hedge accounting relationships. The hedged
items include issued sterling, Euro and Yen denominated fixed rate debt and issued sterling denominated floating rate debt.
As well as the benchmark interest rate exposures described in note 35, the Group has derivative financial instruments in its trading books that
are not included in hedge accounting relationships. Given hedge accounting is not applied, there is no accounting relief. The fair value of these
financial assets and liabilities reflects the uncertainties arising from the interest rate benchmark reforms.
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The Group has closely monitored the market and the output from the various industry working groups managing the transition to new
benchmark interest rates. This includes announcements made by LIBOR regulators (including the Financial Conduct Authority (FCA) to the
Sterling Overnight Index Average Rate (SONIA). The FCA has made clear that, at the end of 2021, it will no longer seek to persuade, or compel,
banks to submit to LIBOR.
In response to the announcements, the Group has established a LIBOR transition group within Group Treasury with an objective of identifying
and assessing LIBOR exposures within the business and developing and delivering an action plan to enable a smooth transition to alternative
benchmark rates. The Group aims to have its transition and fall-back plans in place by the end of this financial year.
None of the Group’s current GBP LIBOR-linked contracts include adequate and robust fall-back provisions for a cessation of the referenced
benchmark interest rate. Different working groups in the industry are working on fall-back language for different instruments and different
IBORs, which the Group is monitoring closely and will look to implement these when appropriate.
For the Group’s derivatives, the International Swaps and Derivatives Association’s (ISDA) fall-back clauses were made available at the end of 2019
and the Group will begin discussion with its banks with the aim to implement this language into its ISDA agreements during this financial year.
For the Group’s floating rate debt, we will seek to refinance our committed bank facilities, including our Revolving Credit Facility, ahead of the
LIBOR transition. The Group will begin a dialogue with our other lenders, comprising bank lenders and USPP noteholders during this financial
year to propose amendments to the fall-back provisions to move from GBP LIBOR to SONIA.
Below are details of the hedging instruments and hedged items in scope of the IFRS 9/IAS 39 amendments due to interest rate benchmark
reform, by hedge type. The terms of the hedged items listed match those of the corresponding hedging instruments.
Below are the details of the cash flow hedging instruments and hedged items:
Instrument type
Instrument details
Maturing in
Nominal
£m
Hedged item
Interest rate swaps
Pay sterling fixed, receive 6m GBP LIBOR
Pay sterling fixed, receive 6m GBP LIBOR
Pay sterling fixed, receive 6m GBP LIBOR
Pay sterling fixed, receive 6m GBP LIBOR
Forward-starting interest rate swaps
Pay sterling fixed, receive 6m GBP LIBOR
Pay sterling fixed, receive 6m GBP LIBOR
Pay sterling fixed, receive 6m GBP LIBOR
Below are the details of the fair value hedging instruments and hedged items:
2027
2027
2028
2031
2030
2030
2030
6m GBP LIBOR debt with same
maturity and nominal as the swap
32.2
50.0
50.0
48.0
50.0 Forecast interest payments on debt
with the same nominal as the swap
150.0
50.0
Instrument type
Instrument details
Maturing in
Nominal Hedged item
Cross currency swaps
Receive JPY fixed, pay 6m GBP LIBOR
Receive EUR fixed, pay 6m GBP LIBOR
2029
2025
¥2bn Fixed JPY debt with same maturity
and nominal as the swap
€19.9m Fixed EUR debt with same maturity
and nominal as the swap
The Group will continue to apply the amendments to IFRS 9/IAS 39 until the uncertainty arising from the interest rate benchmark reforms with
respect to the timing and the amount of the underlying cash flows that the Group is exposed to ends. The Group has assumed that this uncertainty
will not end until the Group’s contracts that reference IBORs are amended to specify: the date on which the interest rate benchmark will be
replaced, the cash flows of the alternative benchmark rate, and the relevant spread adjustment. This will, in part, be dependent on the
introduction of fall back clauses that have yet to be added to the Group’s contracts and the negotiation with lenders and bondholders.
37 SHARE BASED PAYMENT
The Group operates a number of share based remuneration schemes for employees. During the year, the Group recognised total expenses
of £8.1 million (2019: £8.1 million) related to equity settled share based payment transactions.
The weighted average share price during the period was £22.07 (2019: £19.27).
At 31 March 2020, there were no options exercisable (2019: none) under any of the share based remuneration schemes.
Long Term Incentive Plans (LTIPs)
a)
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 2016, 2017, 2018 and 2019 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 business plans over a three year vesting period. It has been assumed that performance against the LTIP
non-market conditions will be 100% (2019: 100%).
185
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CONTINUED
Long Term Incentive Plans (LTIPs) (continued)
37 SHARE BASED PAYMENT (CONTINUED)
a)
(ii) Awards outstanding
Details of changes in the number of awards outstanding during the year are set out below:
Opening at 1 April 2018
Granted during the year
Vested during the year
Lapsed during the year
Outstanding at 1 April 2019
Granted during the year
Vested during the year
Lapsed during the year
Outstanding at 31 March 2020
Details of LTIP awards outstanding at 31 March were as follows:
Date of grant
July 2016
July 2017
July 2018
July 2019
Number of
awards
548,774
272,057
(159,463)
(35,945)
625,423
281,905
(174,445)
(14,732)
718,151
Normal date
of vesting
2019
2020
2021
2022
Number of awards
2020
–
181,070
266,178
270,903
718,151
2019
175,543
181,070
268,810
–
625,423
Details of the basis of the LTIP scheme are set out in the Directors’ remuneration report on pages 103 and 104.
Employee Sharesave Scheme
b)
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.
Options outstanding
Details of changes in the number of options outstanding during the year are set out below:
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 1 April 2019
Granted during the year
Forfeited during the year
Cancelled during the year
Exercised during the year
Lapsed during the year
Outstanding at 31 March 2020
186
Number of share
options
Weighted
average
exercise price
3,574,931
1,331,044
(58,285)
(405,861)
(721,312)
(6,000)
3,714,517
1,042,857
(46,040)
(152,843)
(593,395)
(9,074)
1,625p
1,474p
1,663p
1,654p
1,532p
1,575p
1,585p
1,787p
1,586p
1,564p
1,621p
1,623p
3,956,022
1,633p
Severn Trent Plc Annual Report and Accounts 2020 Sharesave options outstanding at 31 March were as follows:
Date of grant
January 2014
January 2015
January 2016
January 2017
January 2018
January 2019
January 2020
Normal date of exercise
Option price
2019
2020
2019 or 2021
2020 or 2022
2021 or 2023
2022 or 2024
2023 or 2025
1,331p
1,584p
1,724p
1,633p
1,652p
1,474p
1,787p
Number of awards
2020
–
215,914
117,428
625,429
740,496
2019
144,212
227,212
556,447
662,545
804,957
1,219,105
1,319,144
1,037,650
–
3,956,022
3,714,517
Fair value calculations
c)
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:
LTIP
2020
SAYE
LTIP
2019
SAYE
3-year scheme
5-year scheme
3-year scheme
5-year scheme
Share price at grant date (pence)
2,026
2,515
2,515
1,884
1,849
1,849
Option life (years)
Vesting period (years)
Expected volatility (%)
Expected dividend yield (%)
Risk free rate (%)
Fair value per share (pence)
3
3
18.2
5.0
n/a
2,007
3.5
3
18.2
5.0
0.5
489
5.5
5
18.2
5.0
0.6
416
3
3
18.2
4.0
n/a
1,866
3.5
3
18.2
4.0
0.6
303
5.5
5
18.2
4.0
0.8
284
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.
38 ACQUISITIONS
On 30 November 2018, Severn Trent Green Power Limited acquired 100% of the issued share capital of Agrivert Holdings Limited, for a total
consideration of £61.3 million and the assumption of £59.7 million of existing debt.
The acquisition was accounted for using the acquisition method. Goodwill of £28.7 million was capitalised, attributable to the anticipated future
opportunities and outperformance arising as a result of the acquisition. The goodwill valuation was based on management’s best estimates of
the fair values of the assets and liabilities acquired.
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 adjustments to fair values recognised at 31 March 2020 are set out below:
Goodwill recognised at 1 April 2019 based on provisional fair values
Adjustment to estimated fair value of trade and other receivables
Goodwill recognised at 31 March 2020 based on final fair values
£m
28.7
0.5
29.2
During the 12 month period post-acquisition, new information was obtained regarding accrued income held within the entities acquired. This new
information related to disputed amounts and amounts that relate to debtors that had gone into administration. The provision for the doubtful
collection of accrued income as at the acquisition date has therefore been adjusted in the fair values of trade and other receivables on acquisition.
See note 16 for reconciliation of goodwill recognised for the Group.
187
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CONTINUED
39 CASH FLOW STATEMENT
a) Reconciliation of operating profit to operating cash flows
Profit before interest and tax
Depreciation of property, plant and equipment
Depreciation of right-of-use assets
Amortisation of intangible assets
Amortisation of acquired intangible assets
Impairment of property, plant and equipment
Pension service cost
Defined benefit pension scheme administration costs
Defined benefit pension scheme contributions
Share based payment charge
Loss on sale of property, plant and equipment and intangible assets
Release from deferred credits
Contributions and grants received1
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
2020
£m
568.2
327.4
6.6
30.8
2.1
0.5
0.2
3.4
2019
£m
563.3
315.4
–
29.8
0.7
–
9.8
2.3
(46.2)
(34.9)
8.1
1.2
(15.4)
39.6
3.3
(13.1)
916.7
(8.4)
(12.8)
32.6
928.1
0.4
(34.3)
894.2
8.1
0.6
(14.7)
46.5
12.2
(12.8)
926.3
(1.7)
(60.0)
8.2
872.8
–
(21.3)
851.5
1 Contributions and grants received have been presented as operating cash flows in 2019/20 as these credits are released to operating costs over the useful economic life of the non-current
asset to which they relate. These were presented as investment cash flows in prior periods. Comparatives have been restated increasing operating cash inflows by £46.5 million and
increasing investing cash outflows by the same amount.
b) Non-cash transactions
Non-cash investing and financing cash flows disclosed in other notes were:
– Acquisition of right-of-use assets (note 19).
– Acquisition of infrastructure assets from developers at no cost (note 18).
– Shares issued to employees for no cash consideration under the LTIP (note 37).
Exceptional cash flows
c)
There were no cash flows from items classified as exceptional in the income statement (2019 nil).
d) Reconciliation of movement in cash and cash equivalents to movement in net debt
Net cash and
cash equivalents
£m
Bank loans
£m
Other loans
£m
Lease liabilities
£m
Cross currency
swaps
£m
Loans due from
joint ventures
£m
Net debt
£m
As at 31 March 2019
Recognised on adoption of IFRS 16 (see note 2 a)
As at 1 April 2019
Cash flow
Fair value adjustments
Inflation uplift on index-linked debt
Foreign exchange
Other non-cash movements
As at 31 March 2020
39.6
–
39.6
9.0
–
–
–
–
(1,120.1)
(4,820.5)
–
–
(1,120.1)
(4,820.5)
(128.1)
(199.0)
–
(2.2)
–
(1.5)
(0.5)
(31.8)
(6.7)
–
(112.2)
(15.9)
(128.1)
5.5
–
–
–
(0.1)
37.1
–
37.1
–
23.3
–
–
–
48.6
(1,251.9)
(5,058.5)
(122.7)
60.4
142.0
(5,834.1)
–
142.0
(35.6)
–
–
–
(13.8)
92.6
(15.9)
(5,850.0)
(348.2)
22.8
(34.0)
(6.7)
(15.4)
(6,231.5)
Liabilities from financing activities comprise bank loans, other loans and leases.
188
Severn Trent Plc Annual Report and Accounts 2020 40 CONTINGENT LIABILITIES
Bonds and guarantees
Group undertakings have entered into bonds and guarantees in the normal course of business. No liability (2019: nil) is expected to arise in
respect of either bonds or guarantees.
41 FINANCIAL AND OTHER COMMITMENTS
a)
Investment expenditure commitments
Contracted for but not provided for in the financial statements
2020
£m
287.6
2019
£m
359.2
In addition to these contractual commitments, Severn Trent Water Limited has longer-term expenditure plans which include investments to
achieve improvements in performance mandated by the Director General of Water Services (Ofwat) and to provide for growth in demand for
water and waste water services.
Leasing commitments
b)
The Group leases property, plant and equipment under non-cancellable operating leases. From 1 April 2019 the Group has recognised right-of-
use assets for these leases, except for short-term and low-value leases (see note 2 for further details). At 31 March the Group had outstanding
commitments for future minimum operating lease payments under these leases as follows:
Within 1 year
1 – 5 years
After more than 5 years
2020
£m
0.1
0.1
–
0.2
2019
£m
2.8
4.2
10.5
17.5
42 POST BALANCE SHEET EVENTS
Following the year end the Board of Directors has proposed a final dividend of 60.05 pence per share. Further details of this are shown in note 14.
43 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
2020
£m
306.6
3.2
309.8
2020
£m
12.1
92.6
104.7
2019
£m
335.0
3.8
338.8
2019
£m
2.3
142.0
144.3
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.
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 page 120.
Short-term employee benefits
Share based payments
2020
£m
7.4
4.2
11.6
2019
£m
6.5
2.9
9.4
189
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information
NOTES TO THE GROUP FINANCIAL STATEMENTS
CONTINUED
44 ALTERNATIVE PERFORMANCE MEASURES
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 alternative performance measures, these might not be directly comparable with other companies’ alternative
performance measures. These measures are not intended to be a substitute for, or superior to, IFRS measurements.
Exceptional items
a)
Exceptional items are income or expenditure which individually, or in aggregate if of a similar type, 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 consistent 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 exclude the effects of exceptional items, amortisation of intangible assets recognised on the acquisition
of subsidiaries, net (losses)/gains on financial instruments, current tax on exceptional items and on net (losses)/gains on financial instruments,
exceptional current tax 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 39.
Effective interest cost
e)
The effective interest cost 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 finance costs
Average net debt
Effective interest cost
This APM is used as it shows the average finance cost for the net debt of the business.
2020
£m
188.4
(11.1)
44.2
221.5
2019
£m
194.2
(13.8)
33.2
213.6
5,972.2
5,547.7
3.7%
3.9%
190
Severn Trent Plc Annual Report and Accounts 2020 Effective cash cost of interest
f)
The effective cash cost of interest is calculated on the same basis as the effective interest cost except that it excludes finance costs that are not
paid in cash but are accreted to the carrying value of the debt (principally inflation adjustments on index-linked debt).
(net finance costs – net finance costs from pensions – inflation adjustments + capitalised finance costs)
(monthly average net debt)
Net finance costs
Net finance costs from pensions
Inflation adjustments
Capitalised finance costs
Average net debt
Effective cash cost of interest
This is used as it shows the average finance cost that is paid in cash.
g) Underlying PBIT interest cover
The ratio of 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 net finance costs from pensions
PBIT interest cover
2020
£m
188.4
(11.1)
(34.0)
44.2
187.5
2019
£m
194.2
(13.8)
(39.7)
33.2
173.9
5,972.2
5,547.7
3.1%
3.1%
2020
£m
570.3
188.4
(11.1)
177.3
ratio
3.2
2019
£m
573.6
194.2
(13.8)
180.4
ratio
3.2
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.
h) EBITDA and EBITDA interest cover
The ratio of profit 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 (including right-of-use assets)
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
2020
£m
570.3
334.0
30.8
935.1
188.4
(11.1)
177.3
ratio
5.3
This is used to show how the EBITDA of the business covers the financing costs associated only with net debt on a consistent basis.
2019
£m
573.6
315.4
29.8
918.8
194.2
(13.8)
180.4
ratio
5.1
191
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information NOTES TO THE GROUP FINANCIAL STATEMENTS
CONTINUED
Underlying effective current tax rate
44 ALTERNATIVE PERFORMANCE MEASURES (CONTINUED)
i)
The current tax charge for the year, excluding prior year charges, exceptional current tax, and current tax on exceptional items and on financial
instruments, divided by profit before tax, net losses/gains on financial instruments, exceptional items, amortisation of intangible assets recognised
on acquisition of subsidiaries, and share of net loss of joint ventures accounted for using the equity method.
(current year current tax charge in the income statement – current tax on exceptional items –
current tax on financial instruments – current tax on amortisation of acquired intangible assets)
(PBT – share of net loss of JVs – exceptional items – net losses/gains on
financial instruments – amortisation of acquired intangible assets)
Profit before tax
Adjustments
Share of net loss of joint ventures
Amortisation of acquired intangible assets
Exceptional items
Net losses/(gains) on financial instruments
Underlying effective current tax rate
£m
310.7
46.8
2.1
4.9
17.4
381.9
2020
Current tax
thereon
£m
(36.2)
–
–
(0.9)
(2.6)
(39.7)
10.4%
£m
384.7
0.4
0.7
9.6
(16.0)
379.4
2019
Current tax
thereon
£m
(41.2)
–
–
–
(2.6)
(43.8)
11.6%
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 loss of joint ventures is excluded from the calculation because the loss is included after tax and so the tax on joint venture
profits is not included in the current tax charge.
Operational cashflow
j)
Cash generated from operations less contributions and grants received.
Cash generated from operations
Contributions and grants received
Operational cashflow
2020
£m
928.1
(39.6)
888.5
2019
£m
872.8
(46.5)
826.3
This APM is used to show operational cash excluding the effect of contributions and grants received as part of capital programmes.
k) Cash capex
Cash paid to acquire property, plant and equipment and intangible fixed assets less contributions and grants received and proceeds on disposal
of property, plant and equipment and intangible fixed assets.
Purchase of property, plant and equipment
Purchase of intangible assets
Contributions and grants received
Proceeds on disposal of property, plant and equipment
Cash capex
This APM is used to show the cash impact of the Group’s capital programmes.
2020
£m
777.2
74.8
(39.6)
(12.9)
799.5
2019
£m
782.1
35.1
(46.5)
(1.4)
769.3
192
Severn Trent Plc Annual Report and Accounts 2020 45 SUBSIDIARY UNDERTAKINGS
Details of all subsidiary undertakings as at 31 March 2020 are given below. Details of the joint venture are set out in note 20. All subsidiary
undertakings have been included in the consolidation.
Owned directly by Severn Trent Plc
Country of operation and incorporation
Percentage of share capital held
Class of share capital held
Severn Trent Investment Holdings Limited
United Kingdom
100%
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
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
Hafren Dyfrdwy Cyfyngedig
Midlands Land Portfolio Limited
North Wales Gas Limited
Northern Gas Supplies Limited
Severn Trent (W&S) Limited
Severn Trent Data Portal Limited
Severn Trent Draycote Limited
Severn Trent Finance Holdings Limited
Severn Trent Finance Limited
Severn Trent General Partnership Limited
Severn Trent Green Power (Ardley) 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 Property Solutions Limited
Severn Trent Reservoirs Limited
Severn Trent Retail and Utility Services Limited
Severn Trent Services (Water and Sewerage) Limited
Severn Trent Services Defence Holdings Limited
Severn Trent Services Defence Limited
Severn Trent Services Holdings Limited
Severn Trent Services International (Overseas Holdings) Limited
Severn Trent Services International Limited
Severn Trent Green Power (Bridgend) Limited
Severn Trent Services Operations UK 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 Services UK Limited
Severn Trent SSPS Trustees Limited
Severn Trent Trimpley Limited
Severn Trent Utilities Finance Plc
Severn Trent Water Limited
Severn Trent Wind Power Limited
Severn Trent WWIF Limited
Wrexham Water Limited
All subsidiary undertakings
Country of operation and incorporation
Percentage of share capital held
Class of share capital held
Athena Holdings Limited
Derwent Insurance Limited
Hong Kong
Gibraltar
Energy Supplies UK Limited
United Kingdom
Lyra Insurance Guernsey Limited
Guernsey
Severn Trent Africa (Pty) Ltd
South Africa
Severn Trent Carsington Limited
United Kingdom
Severn Trent Response Limited
Ireland
100%
100%
100%
100%
100%
100%
60%
Ordinary
Ordinary
A and B Ordinary
Ordinary
Ordinary
A and B Ordinary
Ordinary
193
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information NOTES TO THE GROUP FINANCIAL STATEMENTS
CONTINUED
45 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
Athena Holdings Limited
Dee Valley Limited
Hafren Dyfrdwy Cyfyngedig
Derwent Insurance Limited
Lyra Insurance Guernsey Limited
Severn Trent Africa (Pty) Ltd
Registered office
One 33, Hysan Avenue, Causeway Bay, Hong Kong
Packsaddle, Wrexham Road, Rhostyllen, Wrexham, LL14 4EH
Packsaddle, Wrexham Road, Rhostyllen, Wrexham, LL14 4EH
6A Queensway, PO Box 64, Gibraltar
St Martin's House, Le Bordage, St Peter Port, GY1 4AU, Guernsey
2 Elgin Road, Sunninghill, Johannesburg, South Africa
Severn Trent General Partnership Limited
50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ
Severn Trent Green Power (Ardley) Limited
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
Severn Trent Green Power (Bridgend) Limited
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
Severn Trent Green Power (Cassington) Limited
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
Severn Trent Green Power (CW) Limited
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
Severn Trent Green Power (Hertfordshire) Limited
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
Severn Trent Green Power (North London) Limited
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
Severn Trent Green Power (RBWM) Limited
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
Severn Trent Green Power (Wallingford) Limited
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
Severn Trent Green Power (West London) Limited
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
Severn Trent Green Power Biogas Limited
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
Severn Trent Green Power Composting Limited
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
Severn Trent Green Power Group Limited
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
Severn Trent Green Power Holdings Limited
The Stables, Radford, Chipping Norton, Oxfordshire, OX7 4EB
Severn Trent Response Limited
6th Floor, 2 Grand Canal Square, Dublin 2, Ireland
194
Severn Trent Plc Annual Report and Accounts 2020 Subsidiary audit exemptions
Severn Trent Plc has issued guarantees over the liabilities of the following companies at 31 March 2020 under section 479C of the 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
Chester Water Limited
Dee Valley Group Limited
Dee Valley Limited
Dee Valley Water (Holdings) Limited
East Worcester Water Limited
Etwall Land Limited
Severn Trent (W&S) Limited
Severn Trent Carsington Limited
Severn Trent Data Portal Limited
Severn Trent Draycote Limited
Severn Trent Finance Holdings Limited
Severn Trent Finance Limited
Severn Trent General Partnership Limited
Severn Trent Green Power (Ardley) Limited
Severn Trent Green Power (Hertfordshire) Limited
Severn Trent Green Power (North London) Limited
Severn Trent Green Power (West London) Limited
Severn Trent Green Power Composting Limited
Severn Trent Holdings Limited
Severn Trent Investment Holdings Limited
Severn Trent LCP Limited
Severn Trent Leasing Limited
Severn Trent Metering Services Limited
Severn Trent Overseas Holdings Limited
Severn Trent Reservoirs Limited
Severn Trent Services Holdings Limited
Severn Trent Services International (Overseas Holdings) Limited
Severn Trent Services International Limited
Severn Trent Services UK Limited
Severn Trent Retail and Utility Services Limited
Severn Trent Trimpley Limited
Company
number
2888872
4316684
2902525
4421854
2757948
7559793
3995023
7570384
8181048
7681784
6044159
6294618
SC416614
5807721
6771560
9689098
8308321
4927756
5656363
7560050
7943556
6810163
2569703
2455508
3115315
4395572
3125131
2387816
8120387
2562471
10690056
195
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information COMPANY STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 2020
Profit for the year
Other comprehensive income/(loss)
Items that will not be reclassified to the income statement:
Net actuarial gains/(losses)
Deferred tax on net actuarial gains
Deferred tax arising on change of rate
Other comprehensive income/(loss) for the year
Total comprehensive income for the year
Note
15
6
6
2020
£m
237.8
0.5
(0.1)
0.2
0.6
238.4
2019
£m
216.5
(0.1)
–
–
(0.1)
216.4
COMPANY STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MARCH 2020
At 1 April 2018
Profit for the year
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
Profit for the year
Net actuarial gains
Deferred tax on net actuarial gains
Deferred tax arising from rate change
Total comprehensive income for the year
Share options and LTIPs
– proceeds from shares issued
– value of employees’ services
Dividends paid
At 31 March 2020
Note
15
11,12
19
15
6
6
11,12
19
Share
capital
£m
235.1
Share
premium
£m
117.7
Other
reserves
£m
160.7
–
–
–
0.8
–
–
–
–
–
10.3
–
–
–
–
–
–
–
–
235.9
128.0
160.7
–
–
–
–
–
0.6
–
–
–
–
–
–
–
9.0
–
–
–
–
–
–
–
–
–
–
Retained
earnings
£m
2,958.4
216.5
(0.1)
216.4
–
7.2
Total
£m
3,471.9
216.5
(0.1)
216.4
11.1
7.2
(211.9)
(211.9)
2,970.1
237.8
3,494.7
237.8
0.5
(0.1)
0.2
0.5
(0.1)
0.2
238.4
238.4
–
8.1
9.6
8.1
(228.4)
(228.4)
236.5
137.0
160.7
2,988.2
3,522.4
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. Distributable reserves are therefore £1,767.0 million.
196
Severn Trent Plc Annual Report and Accounts 2020
COMPANY BALANCE SHEET
FOR THE YEAR ENDED 31 MARCH 2020
Non-current assets
Intangible fixed assets
Tangible fixed assets
Right-of-use 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 for liabilities
Net current liabilities
Total assets less current liabilities
Non-current liabilities
Borrowings
Trade and other payables
Retirement benefit obligations
Provisions for liabilities
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 £237.8 million (2019: £216.5 million).
Signed on behalf of the Board which approved the accounts on 19 May 2020.
Christine Hodgson
Chair
James Bowling
Chief Financial Officer
Company number: 02366619
Note
2
3
4
5
6
7
7
8
9
10
8
9
10
11
12
13
2020
£m
0.1
0.6
1.0
2019
£m
0.1
0.5
–
3,346.0
3,337.9
1.5
855.5
1.6
659.8
4,204.7
3,999.9
27.3
2.6
7.7
37.6
(9.9)
(120.7)
(5.3)
(135.9)
(98.3)
23.8
25.2
1.9
50.9
(4.5)
(147.1)
(3.6)
(155.2)
(104.3)
4,106.4
3,895.6
(292.0)
(280.9)
(7.9)
(3.2)
(88.3)
(298.9)
(8.6)
(5.1)
(584.0)
(400.9)
3,522.4
3,494.7
236.5
137.0
160.7
2,988.2
3,522.4
235.9
128.0
160.7
2,970.1
3,494.7
197
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information
NOTES TO THE COMPANY FINANCIAL STATEMENTS
EMPLOYEE NUMBERS
1
The average number of employees during the year was 10 (2019: 11).
2
INTANGIBLE FIXED ASSETS
Cost
As at 1 April 2019 and 31 March 2020
Amortisation
As at 1 April 2019 and 31 March 2020
Net book value
At 31 March 2020
At 31 March 2019
3
TANGIBLE FIXED ASSETS
Cost
At 1 April 2019
Additions
At 31 March 2020
Depreciation
At 1 April 2019 and 31 March 2020
Net book value
At 31 March 2020
At 31 March 2019
Purchased
software
£m
0.2
(0.1)
0.1
0.1
Assets under
construction
0.5
0.1
0.6
–
0.6
0.5
RIGHT-OF-USE ASSETS
The Company’s leasing activities
4
a)
The Company leases property with the lease agreement covering a fixed period of 10 years.
The contract does not include covenants other than security interests in the leased assets that are held by the lessor and leased assets may not
be used as security for other borrowing. The contract does not impose any restrictions on dividend payment, additional debt or further leasing.
There were no sale and leaseback transactions in the period.
Income statement
b)
The income statement includes the following amounts relating to leases for the year ended 31 March 2020:
Depreciation charge of right-of-use assets:
Property
Total depreciation of right-of-use assets
Interest expense included in finance cost
There were no expenses for leases that are classified under the short-term or low-value exemption.
2020
£m
0.1
0.1
0.1
2019
£m
–
–
–
198
Severn Trent Plc Annual Report and Accounts 2020 c) Balance sheet
The change in accounting policy affected the following items in the balance sheet on 1 April 2019:
Right-of-use assets
Borrowings
The balance sheet includes the following amounts relating to leases:
Right-of-use assets:
Property
There were no additions to right-of-use assets.
Lease liabilities:
Current
Non-current
At 31 March 2019, the Company had no property, plant and equipment financed by finance leases.
Net lease obligations were as follows:
Within 1 year
1 – 2 years
2 – 5 years
After more than 5 years
Included in non-current liabilities
5
INVESTMENTS IN SUBSIDIARIES
As at 1 April 2019
Additions
As at 31 March 2020
31 March
2020
£m
1.0
1.0
31 March
2020
£m
0.1
1.0
1.1
2020
£m
0.1
0.1
0.3
0.6
1.0
1.1
Details of principal subsidiaries of the Company are given in note 45 to the Group financial statements.
6
DEFERRED TAX
At 1 April 2018
Credit to income
At 1 April 2019
Charge to income
Charge to equity
Credit to equity arising from rate change
At 31 March 2020
Accelerated tax
depreciation
£m
Retirement
benefit
obligations
£m
–
0.1
0.1
(0.1)
–
–
–
1.5
–
1.5
(0.1)
(0.1)
0.2
1.5
£m
1.1
(1.1)
1 April
2019
£m
1.1
1.1
1 April
2019
£m
0.1
1.0
1.1
2019
£m
–
–
–
–
–
–
£m
3,337.9
8.1
3,346.0
Total
£m
1.5
0.1
1.6
(0.2)
(0.1)
0.2
1.5
199
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information NOTES TO THE COMPANY FINANCIAL STATEMENTS
CONTINUED
7
TRADE AND OTHER RECEIVABLES
Current assets
Other amounts receivable
Prepayments
Amounts owed by group undertakings
Non-current assets
Loans receivable
Amounts owed by group undertakings under loan agreements
8
BORROWINGS
Current liabilities
Bank overdraft
Lease liabilities
Non-current liabilities
Other loans
Lease liabilities
At the balance sheet date the Company had £100 million (2019: £100 million) undrawn borrowing facilities.
9
TRADE AND OTHER PAYABLES
Current liabilities
Trade payables
Social security and other taxes
Other payables
Accruals
Amounts due to group undertakings
Non-current liabilities
Accruals
Amounts due to group undertakings
200
2020
£m
6.9
–
20.4
27.3
–
855.5
855.5
882.8
2020
£m
9.8
0.1
9.9
291.0
1.0
292.0
301.9
2020
£m
0.1
0.1
4.6
1.1
114.8
120.7
1.5
279.4
280.9
401.6
2019
£m
6.5
0.4
16.9
23.8
32.4
627.4
659.8
683.6
2019
£m
4.5
–
4.5
88.3
–
88.3
92.8
2019
£m
0.3
0.1
4.0
3.4
139.3
147.1
–
298.9
298.9
446.0
Severn Trent Plc Annual Report and Accounts 2020 10 PROVISIONS
At 1 April 2019
Charged to income statement
Utilisation of provision
At 31 March 2020
Included in:
Current liabilities
Non-current liabilities
Insurance
£m
5.0
(1.8)
(0.1)
3.1
Other
£m
3.7
2.5
(0.8)
5.4
2020
£m
5.3
3.2
8.5
Total
£m
8.7
0.7
(0.9)
8.5
2019
£m
3.6
5.1
8.7
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.
11 SHARE CAPITAL
Total issued and fully paid share capital
241,537,324 Ordinary Shares of 97 17/19 pence (2019: 240,943,929)
2020
£m
2019
£m
236.5
235.9
At 31 March 2020, treasury shares of 3,581,338 (2019: 3,774,921) were held at a nominal value of £3.5 million (2019: £3.7 million).
Changes in share capital were as follows:
Ordinary shares of 97 17/19 pence
At 1 April 2018
Shares issued under the Employee Sharesave Scheme
At 1 April 2019
Shares issued under the Employee Sharesave Scheme
At 31 March 2020
12 SHARE PREMIUM
At 1 April
Share premium arising on issue of shares for Employee Sharesave Scheme
At 31 March
13 OTHER RESERVES
At 1 April 2018, 31 March 2019 and 2020
The capital redemption reserve arose on the redemption of B shares.
Number
£m
240,222,617
721,312
240,943,929
593,395
241,537,324
2020
£m
128.0
9.0
137.0
Capital
redemption
reserve
£m
Hedging reserve
£m
157.1
3.6
235.1
0.8
235.9
0.6
236.5
2019
£m
117.7
10.3
128.0
Total
£m
160.7
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.
201
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information NOTES TO THE COMPANY FINANCIAL STATEMENTS
CONTINUED
14 SHARE BASED PAYMENT
For details of employee share schemes and options granted over the shares of the Company, see note 37 to 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.
15 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 (2019: £0.4 million).
There were no amounts outstanding for contributions to the defined benefit schemes (2019: 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.
16 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 to the Group financial statements.
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 £54.1 million
(2019: £58.1 million) and the guarantees for the Severn Trent Water loan is for the amount due.
The Company has also made available to Water Plus a revolving credit facility of £32.5 million. At 31 March 2020 the amount drawn was nil
(2019: £32.5 million).
17 CONTINGENT LIABILITIES
a) Bonds and guarantees
The Company has entered into bonds and guarantees in the normal course of business. No liabilities are expected to arise in respect of either
the bonds or guarantees.
b) Bank offset arrangements
The banking arrangements of the Company operate on a pooled basis with certain of its subsidiary undertakings. Under these arrangements
participating companies guarantee each other’s overdrawn balances to the extent of their credit balances, which can be offset against balances
of participating companies. As at 31 March 2020, the Company had no contingent liabilities (2019: nil).
18 POST BALANCE SHEET EVENTS
Following the year end the Board of Directors has proposed a final dividend of 60.05 pence per share.
19 DIVIDENDS
For details of the dividends paid in the years ended 31 March 2020 and 31 March 2019 see note 14 to the Group financial statements.
202
Severn Trent Plc Annual Report and Accounts 2020 FIVE YEAR SUMMARY
Continuing operations
Turnover
Profit before interest, tax, amortisation of acquired
intangible assets and exceptional items
Net exceptional items before tax
Amortisation of acquired intangible assets
Net interest payable before (losses)/gains on financial
instruments and exceptional finance costs
(Losses)/gains on financial instruments
Results of associates and joint ventures1
Profit on ordinary activities before taxation
Current taxation on profit on ordinary activities
Deferred taxation
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
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 – %
2020
£m
2019
£m
2018
£m
2017
£m
2016
£m
1,843.5
1,767.4
1,696.4
1,638.0
1,753.7
570.3
(51.7)
(2.1)
(188.4)
(17.4)
–
310.7
(30.1)
(29.1)
(92.7)
158.8
–
158.8
573.6
(9.6)
(0.7)
539.8
(12.6)
–
520.1
16.6
–
503.4
1.0
–
(194.2)
(219.5)
(205.1)
(209.3)
16.0
(0.4)
384.7
(31.8)
(39.4)
1.8
315.3
–
315.3
(6.7)
0.2
301.2
(32.9)
(28.7)
–
239.6
13.2
252.8
(1.8)
(1.8)
328.0
(36.3)
(22.4)
52.2
321.5
21.1
342.6
7.7
0.1
302.9
(51.3)
(13.7)
78.6
316.5
14.8
331.3
9,954.8
9,337.7
8,660.1
8,315.7
7,810.8
(1,142.0)
(158.5)
(234.0)
(945.1)
(992.6)
(95.1)
(452.9)
(798.9)
(956.0)
(104.3)
(519.8)
(726.5)
(916.8)
(161.1)
(574.6)
(657.5)
(798.4)
(166.3)
(309.5)
(694.7)
7,475.2
6,998.2
6,353.5
6,005.7
5,841.9
236.5
1,007.2
1,243.7
–
6,231.5
7,475.2
66.7
146.0
100.1
1.5
83.4
235.9
928.2
1,164.1
–
5,834.1
6,998.2
133.4
145.8
93.4
1.6
83.3
235.1
761.8
996.9
–
5,356.6
6,353.5
101.8
120.5
86.6
1.4
84.4
234.7
688.6
923.3
–
5,082.4
6,005.7
136.8
115.7
81.5
1.4
84.6
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
Ordinary share price at 31 March – pence
2,280.0
1,976.0
1,844.0
2,382.0
2,173.0
Average number of employees
– Regulated Water and Waste Water
– Other
1 Excludes exceptional share of net losses of joint venture.
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.
5,824
972
5,680
900
5,660
605
5,273
596
5,236
2,122
203
Severn Trent Plc Annual Report and Accounts 2020Strategic reportGovernanceGroup financial statements Company financial statementsOther information
INFORMATION FOR SHAREHOLDERS
SEVERN TRENT SHAREHOLDER HELPLINE
The Company’s registrar is Equiniti. Equiniti’s main
responsibilities include maintaining the shareholder
register and making dividend payments.
If you have any queries relating to your Severn Trent Plc
shareholding you should contact Equiniti.
Registrar contact details:
Online: www.shareview.co.uk
From here you will be able
to securely email Equiniti with your query.
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 sustainability and innovation.
There is also a dedicated Investors’ section on the website which
contains up to date information for shareholders including:
– comprehensive share price information;
– financial results;
– a history of dividend payment dates and amounts; and
– access to current and historical shareholder documents
such as the Annual Report and Accounts.
ELECTRONIC COMMUNICATIONS
By registering to receive shareholder documentation from Severn
Trent Plc electronically shareholders can benefit from being able to:
– view the Annual Report and Accounts on the day it is published;
– receive an email alert when shareholder documents are available;
– cast their AGM vote electronically; and
– manage their shareholding quickly and securely online,
through Shareview.
Electronic shareholder communications also enable the Company
to reduce its impact on the environment and benefit from savings
associated with reduced printing and mailing costs.
For further information and to register for electronic shareholder
communications visit www.shareview.co.uk
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
204
Severn Trent Plc Annual Report and Accounts 2020 OTHER INFORMATION
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 may 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:
– 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.
– Beware of fraudsters claiming to be from an authorised firm,
copying its website or giving you false contact details.
– Use the firm’s contact details listed on the Register if you want
to call it back.
– 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.
– 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.
AMERICAN DEPOSITARY RECEIPTS (‘ADRS’)
Severn Trent has a sponsored Level 1 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.
If you have any enquiries regarding Severn Trent ADRs please contact
The Bank of New York Mellon.
By post: BNY Mellon Shareowners Services, PO Box 30170,
College Station, TX 77842-3170, US
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 9.00am to 5.00pm Monday to Friday (excluding
public holidays in England and Wales).
**
Lines are open Monday to Friday, 8.00am to 4.30pm for dealing,
and until 6.00pm for enquiries (excluding public holidays in
England and Wales).
FINANCIAL CALENDAR
Ex dividend date – final dividend
Record date to be eligible for the final dividend
AGM
Interim management statement –
Q1 year ended 31 March 2021
Final dividend payment date
Interim results announcement –
year ended 31 March 2021
11 June 2020
12 June 2020
15 July 2020
15 July 2020
17 July 2020
26 November 2020
Ex dividend date – interim dividend
3 December 2020
Record date to be eligible for the interim dividend
4 December 2020
Interim dividend payment date
6 January 2021
All dates are indicative and may be subject to change.
Consultancy, design and production
www.luminous.co.uk
Design and production
www.luminous.co.uk
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
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