Severn Trent Plc Annual Report and Accounts 2016 SERVING LEGACY TRUST Severn Trent Plc | Annual Report and Accounts 2016 Contents 2016 highlights Strategic report Turnover ifc 2016 highlights 02 What we do 10 Chairman’s statement 13 Market and industry overview 16 Chief Executive’s review 20 How we are achieving our strategy 28 Regulated Water and £1,786.9m Waste Water 2015: £1,801.3m 36 Business Services 41 Financial review 46 Risk management 48 Principal risks Group Underlying Profit Before Group Profit Before Interest and Tax 54 Corporate Responsibility report Interest and Tax Governance 65 Chairman’s letter 66 Board of Directors £523.8m 68 Executive Committee £522.8m 2015: £521.6m 69 Governance report 79 Nominations Committee 2015: £540.3m 82 Audit Committee 86 Corporate Responsibility Committee 89 Remuneration Committee Dividend per share Underlying earnings per share 102 Directors’ report 106 Directors’ Responsibilities Statement Group financial 80.66p 108.7p statements 2015: 84.90p 2015: 107.2p 108 Independent auditor’s report to the members of Severn Trent Plc 112 Consolidated income statement Financial performance: 113 Consolidated statement of comprehensive income Underlying EPS Underlying Group Profit Group Profit Before Tax 114 Consolidated statement of changes in equity Before Tax £322.3 million 115 Consolidated balance sheet £313.6 million 116 Consolidated cash up 1.4% flow statement year on year up 117.5% 117 Notes to the group up 4.4% year on year financial statements year on year Company financial statements 167 Company statement of comprehensive income Focus on operational improvement: 168 Company balance sheet 169 Company statement of Net Award changes in equity 170 Notes to the parent company financial statements £23.2m Other information In 2012/13 prices pre tax 174 Five year summary 175 Information for shareholders Cautionary statement these forward-looking statements. These factors include, but are not limited This document contains statements that are, or may be deemed to be, to, changes in the economies and markets in which the Group operates; ‘forward-looking statements’ with respect to Severn Trent’s financial changes in the regulatory and competition frameworks in which the Group condition, results of operations and business and certain of Severn Trent’s operates; the impact of legal or other proceedings against or which affect the plans and objectives with respect to these items. Group; and changes in interest and exchange rates. Forward-looking statements are sometimes, but not always, identified by All written or verbal forward-looking statements, made in this document their use of a date in the future or such words as ‘anticipates’, ‘aims’, ‘due’, or made subsequently, which are attributable to Severn Trent or any other ‘could’, ‘may’, ‘will’, ‘would’, ‘should’, ‘expects’, ‘believes’, ‘intends’, ‘plans’, member of the Group or persons acting on their behalf are expressly ‘projects’, ‘potential’, ‘reasonably possible’, ‘targets’, ‘goal’ or ‘estimates’ and, qualified in their entirety by the factors referred to above. Subject to in each case, their negative or other variations or comparable terminology. compliance with applicable laws and regulations, Severn Trent does not Any forward-looking statements in this document are based on Severn intend to update these forward-looking statements and does not undertake Trent’s current expectations and, by their very nature, forward-looking any obligation to do so. statements are inherently unpredictable, speculative and involve risk and Nothing in this document should be regarded as a profits forecast. uncertainty because they relate to events and depend on circumstances that This document is not an offer to sell, exchange or transfer any securities may or may not occur in the future. of Severn Trent Plc or any of its subsidiaries and is not soliciting an offer Forward-looking statements are not guarantees of future performance to purchase, exchange or transfer such securities in any jurisdiction. and no assurances can be given that the forward-looking statements in this Securities may not be offered, sold or transferred in the US absent document will be realised. There are a number of factors, many of which are registration or an applicable exemption from the registration requirements beyond Severn Trent’s control, that could cause actual results, performance of the US Securities Act of 1933 (as amended). and developments to differ materially from those expressed or implied by Annual Report and Accounts 2016 | Severn Trent Plc | 01 Our vision is to be the most trusted water company by 2020, delivering an outstanding Strategic report Strategic customer experience, best value service and environmental leadership. Governance Our purpose is to serve our communities and build a lasting financial statements Group water legacy. Company financial statements Other information DIGITAL FIRST Visit our online Annual Report to see how we have performed and how our strategy will help us achieve our vision of being the most trusted water company by 2020. ar2016.severntrent.com 02 | Severn Trent Plc | Annual Report and Accounts 2016 What we do SERVING OUR CUSTOMERS AND COMMUNITIES We are committed to putting customers at the heart of all we do. Our customers will always come first in our thinking and planning as we deliver our day-to-day business, working together tirelessly to serve our communities. Strategic report Governance Group financial statements Company financial statements Other information Annual Report and Accounts 2016 Annual Report and Accounts | Plc Trent Severn | 03 04 | Severn Trent Plc | Annual Report and Accounts 2016 What we do Annual Report and Accounts 2016 | Severn Trent Plc | 05 BUILDING A LASTING WATER report Strategic LEGACY Governance We are dedicated to ensuring a sustainable future for water and our environment. By recognising the financial statements Group growing challenges and pressures on resources; by investing in smarter, more efficient ways to supply the network and by adopting greener, renewable energy to support our operations, we demonstrate a commitment beyond serving the needs of today to Company financial statements securing a legacy for generations to come. Other information 06 | Severn Trent Plc | Annual Report and Accounts 2016 What we do EARNING THE TRUST OF ALL We are committed to earning the trust of everyone we serve. We will do this by transforming our service today, driving operational improvements and shaping the future of our industry for tomorrow, for the mutual benefit of our customers, communities, investors and employees. Strategic report Governance Group financial statements Company financial statements Other information Annual Report and Accounts 2016 Annual Report and Accounts | Plc Trent Severn | 07 08 | Severn Trent Plc | Annual Report and Accounts 2016 What we do Severn Trent provides clean water and waste water services through our businesses, Severn Trent Water and Severn Trent Business Services Regulated Water and Waste Water About us Wholesale operations One of the largest of the 10 regulated water and engineering and waste water companies in England and Wales. We provide high quality services to more Household customer services than 4.3 million households and businesses in the Midlands and mid-Wales. For further details Page 28 Severn Trent Business Services About us Business retail UK Operating Services (incl. Italy and Ireland) and operating services UK Operating Services provides contract services to municipal and industrial clients and the UK Green energy Ministry of Defence (‘MOD’) for design, build and operation of water and waste water treatment New water markets facilities and networks. Retail services are also provided to UK businesses. For further details Page 36 US Operating Services US Operating Services provides contract services to community, municipal and industrial clients for the operation and maintenance of water and waste water treatment facilities and networks. Renewable Energy Severn Trent Business Services generates renewable energy from wind turbines, anaerobic digestion, hydropower and solar technology. Annual Report and Accounts 2016 | Severn Trent Plc | 09 Where we operate Key facts Our region stretches Turnover Litres of drinking water report Strategic across the heart of the supplied each day UK, from the Bristol £1,506.1m Channel to the Humber, 1.8bn and from mid-Wales to Profit* the East Midlands. Litres of waste water £492.1m collected per day * Before interest, tax and exceptional items 1.4bn Households and Employees Governance businesses served 5,080 4.3m as at 31 March 2016 Group financial statements Group Where we operate Key facts Severn Trent Business Services includes our core businesses Turnover* operating in the UK, the US, and Europe. £674.6m Company financial statements Profit*, ** £38.2m Employees 1,968 as at 31 March 2016 Other information * New segmental basis ** Before interest, tax and exceptional items 10 | Severn Trent Plc | Annual Report and Accounts 2016 Chairman’s statement This has been another positive year for market through Water Plus, our joint venture Severn Trent. We have embraced the new with United Utilities. This will see us combine regulatory environment put in place for Asset both of our business retail operations into a Management Plan 6 (‘AMP6’) and are seeing new focused operation, based in Stoke-on- the fruits of our preparation and hard work Trent. Leveraging our combined experiences in improved service to our customers and the of successful operations in Scotland will returns we can deliver for our shareholders. enable this joint venture to deliver benefits and Embracing regulatory change efficiencies and service quality to customers Following a robust regulatory challenge with when the market opens next year. Ofwat at the end of 2014, we started AMP6 We have long been industry thought leaders with a new regulatory framework that we through our Changing Course series of Underlying Group PBIT* believe will better align the interests of our publications and have continued that trend this customers, employees and investors through year with the publication of our latest report, incentive mechanisms which seek to drive the Charting a Sustainable Course.