Preliminary Announcement of Annual Results

23 May 2018

Results for the year to 31 March 2018

Customer focus, significant investment and operational delivery drive strong performance

· Keeping customers at the heart of our business:

Delivering for customers:sewer flooding (down 34%), water quality complaints (down 12%) and serious pollution incidents (down 71%), but disappointing performance on supply interruptions

− Upper quartile position overall in the year in the UK Customer Service Indexfor utility companies

Lowest bills in Britain: less than £1 per day at £3481, and beating our target to help over 50,000 vulnerable customers

· Delivering sustainable benefits for all stakeholders:

Customer ODIs2: strong service delivery earning a net outperformance payment of £80 million

Efficiencies: Forecast AMP6 totex efficiencies3 increased from £770 million to £870 million. Choosing to reinvest the additional £100 million mainly in our Water business, to improve performance in preparation for AMP7

Environmental performance: confident of achieving 4* status from the Environment Agency for 2017 and reaccredited to the Carbon Trust Standard. Renewables generation now at 38%4

An engaged workforce:six percentage point increase in our employee engagement score. Commenced investment in a training academy to deliver excellent training for our people

Sale of propertynear Nottingham, providing land for 830 homes, generating £18.2 million PBIT5 in 2018/19 and helping to keep customers' bills low

PR19: good progress on our PR19 business plan, ready for submission in September

· Strong group financial results:

− Group turnoverof £1,694 million, an increase of £56 million (3.4%)

Groupunderlying PBIT6 of £541 million, up £21 million (4.0%)

Groupreported PBIT of £528 million, down £8 million (1.5%)

2017/18 Return on Regulatory Equity (RoRE) of 11.5%7

Underlyingbasic EPS8 of 121.0 pence (up 4.6%), reported basic EPS from continuing operations 102.2pence (down 25.3%)

− Proposed final dividend of 51.92 pence, taking the 2017/18 dividend to 86.55 pence

Liv Garfield, Chief Executive, Severn Trent Plc, said:

'I'm pleased that keeping customers at the heart of our business and investing for the long term has continued to drive positive results. We've had another very strong year on customer ODIs, which we know are the metrics our customers care about most. This, allied with a strong set of financial results, and a backdrop of the lowest average combined bill in the land demonstrates our ability to deliver for our stakeholders in a balanced and sustainable way.

We anticipate receiving the top 4* rating from the Environment Agency for the second time in three years, which acknowledges the hard work and importance we place on protecting the environment. We are proud of the overall service we deliver for our customers but we know there are areas to improve. Our customers rightly expect excellence every day and that's what we will continue striving to achieve.

As such I'm pleased to announce plans to invest a further £100 million of totex efficiencies across our core assets and network for the benefit of our customers. This, coupled with our extensive customer engagement programme and performance track record, gives us confidence in our PR19 plan and optimism for the challenges of AMP7.'

Footnotes included on page 2 of this RNS

Group results from continuing operations

Underlying results

Year ended 31 March

2018

2017

Increase

(restated)9

£m

£m

%

Group turnover

1,694.1

1,638.0

3.4

Underlying group PBIT6

541.0

520.1

4.0

pence/

pence/

share

share

Underlying basic EPS 8

121.0

115.7

4.6

Total ordinary dividends

86.55

81.50

6.2

Reported results

Year ended 31 March

2018

2017

Increase/ (decrease)

(restated)9

£m

£m

%

Group turnover

1,694.1

1,638.0

3.4

Group PBIT

528.4

536.7

(1.5)

pence/

pence/

share

share

Basic earnings per share from continuing operations

102.2

136.8

(25.3)

Footnotes to pages 1 and 2 of this RNS

1. Average combined water and sewerage bill for households in 2018/19

2. ODIs = Outcome Delivery Incentives, quoted pre-tax and in 2012/13 prices

3. Efficiencies quoted in nominal prices

4. Generating the equivalent of 38% of our energy needs

5. Profit before interest and tax

6. Underlying PBIT excludes exceptional operating items

7. RoRE quoted net, pre-tax at 2012/13 prices, using Ofwat's RoRE methodology. Under our previously reported methodology, RoRE for 2017/18 was 10.6% (2016/17: 11.0%)

8. Underlying basic EPS is set out in note 11

9. Restated for discontinued operations

Note:FY2018/19 technical guidance is included in the Chief Financial Officer's section of this announcement

Enquiries

Investors & Analysts

Richard Eadie

Severn Trent Plc

+44 (0) 788 980 6578

Head of Investor Relations

Richard Tunnicliffe

Severn Trent Plc

+44 (0) 783 441 9722

Investor Relations Manager

Media

Jonathan Sibun

Tulchan Communications

+44 (0) 207 353 4200

Press Office

Severn Trent Plc

+44 (0) 247 771 5640

Preliminary Results Presentation and Webcast

There will be a presentation of these results at 9:30am BST on Wednesday 23 May at the Rothschild Sky Pavilion, New Court, St Swithin's Lane, London EC4N 8AL. This presentation will be available as a simultaneous webcast on the Severn Trent website (www.severntrent.com) and will remain on the website for subsequent viewing.

Chief Executive's Review

Our performance needs to satisfy the goals of our many stakeholders in a balanced way; with customers receiving great service at affordable prices, investors being fairly rewarded for the risk they take, a healthy local environment and our community benefitting from the positive impact we can have through employment and volunteering to support local initiatives. We have an obligation to provide a service that customers would choose if they could.

Over the first three years of this AMP we are proud to be delivering on this commitment. We have generated savings which will result in £120 million being shared with customers that will help lower bills in AMP7. We also chose to reinvest £220 million of our totex outperformance back into making our business better for customers, our people and the environment, and we're supporting our pensioners by making more than £150 million of pension scheme contributions during AMP6. Our investors too have benefitted through our base dividend commitment of growth at RPI+4%, and this has all been achieved whilst maintaining a sustainable, resilient financial structure.

Balanced investment for our stakeholders is made possible by continuing to deliver in our day to day business activities and this year has been no exception. A clear demonstration of this is our RoRE performance for the year of 11.5% which shows the combined success across customer ODIs, totex, financing and retail performance.

Operationally, our net performance on customer ODI measures, as well as the expected industry recognition through the Environment Agency, are indicators of a successful year overall. Our Waste business in particular continues to deliver high performance across a range of measures that indicates a strong, resilient network. Our focus is on replicating this resilience in our Water business with some encouraging results. However we must acknowledge that short term incidents over the course of a harsh winter let some of our customers down and we must work hard to reduce the risk of this happening in future.

Looking a little further ahead, it is encouraging to see the next price review (PR19) places customers firmly at its core alongside long-term resilience, affordable bills and innovation. We believe our own ambitions are closely aligned to these and that the future regulatory framework will allow top performing companies to earn material outperformance in AMP7, through delivery of great customer service, assessed by customer ODIs, and totex efficiencies, which will help keep customer bills low in future. At the same time, it supports sustainable investment in critical projects, enhancing long term resilience for our customers, improving the health of our environment and creating significant value for investors.

We believe our strategy is the right one to drive the behaviours and actions needed to become the most trusted water company by 2020. Our five areas of priority support our ambition:

− Embedding customers at the heart of all 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

Embedding customers at the heart of all we do

Ofwat has rightly identified great customer service as a key component of high quality business plans for PR19. We are working hard on this in AMP6 and are proud of our progress to date. We have achieved an upper quartile position in the UK Customer Service Index for 2017/18, out of 27 companies across the utilities sector.

We are passionate about improving the experience our customers have when dealing with us, so we were pleased to see a good reduction in total written household complaints, which were down 17% on last year. The latest comparative view positioned us ahead of our listed peers, however we know we have scope for further improvement and we believe this will translate into an improved SIM place in the future.

Connecting new properties to our network is an important part of our service offering. This year we are proud to have been ranked first for Water, with a compliance score of 99.7%, and second for Waste, with a compliance score of 99.9%, in the industry wide KPIs reported by Water UK.

We need to understand the longer term preferences and priorities of our customers in order to shape our PR19 plan. With this in mind, we are running the most intensive customer engagement programme in our history, including targeted research with over 17,000 customers, and analysis of 1.9 million customer contacts and seven million social media conversations.

We have used new approaches, including launching an online community, Tap Chat, to engage customers in discussion topics, quizzes and research. Our Board and Executive Committee members have attended customer workshops to gain a fuller understanding of views on key issues. We are confident that the views of our customers and wider stakeholders will be strongly reflected in our AMP7 plan.

A great business plan starts with affordable bills. Severn Trent continues to have the lowest average combined bills in England and Wales, at £348 for 2018/19. That's £57 (14%) lower than the average for England and Wales, £35 (9%) lower than the next cheapest and £15 (4%) below the average bill in Scotland. Data from the 2017 Global Water Intelligence Tariff Survey shows that bills in our region also compare favourably to cities in many other developed countries. For example, bills in Birmingham, the largest city in our region, are 17% cheaper than those in Paris and almost half the cost of Berlin.

Affordability is a particular concern for the most vulnerable customers in our region, so we are pleased to have once again exceeded our target to support 50,000 customers through a range of initiatives and social tariffs.

Our customers have benefitted from significant improvements in service this AMP. We recognise that the significant customer ODI outperformance payments we have earnt will impact customer bills, so we have volunteered to defer much of this to future periods, to help reduce the impact on bills in the remaining years of AMP6.

Driving operational excellence and continuous innovation

Since the beginning of AMP6, we have made huge strides in performance on many of our customer ODIs. On internal and external sewer flooding, the ODIs that customers deemed most important, we have achieved improvements of 43% and 62% respectively. Our performance across a range of other measures has also been strong; category 3 pollutions are 11% lower, we are helping 53% more vulnerable customers and we have reduced water quality complaints by 12%.

Looking at 2017/18 performance, we have had a strong year overall on customer ODIs, earning a net outperformance payment of £80 million. Our Waste measures have been the driver of this, with year on year improvements across a range of measures, including internal sewer flooding (down 27%), external sewer flooding (down 35%) and serious pollution incidents (down 71%). We are pleased that not a single one of our in-year waste measures was in penalty territory this year. This has helped us earn £109 million of outperformance payments on Waste.

We have continued to make progress in our Water business, but this year has been a challenging one for supply interruptions, following a small number of major bursts in our region and the impact of the harsh conditions in March 2018. Having beaten our targets for this performance measure for the last two years, this is hugely disappointing and we have rightly incurred a significant net underperformance penalty of £29 million on our Water ODIs. The extreme weather has also had consequences for our leakage performance. Disappointingly, despite being on track to hit our performance target up until the extreme weather, we missed our challenging target for the year.

We are encouraged by other areas of our Water performance, particularly in water quality. This year we have achieved our best performance since 2011, through an extensive programme of cleaning and flushing water mains, using a multi-channel approach to contact customers as soon as issues are identified, and by protecting our network from illegal standpipe use.

Dee Valley has had a very strong year operationally, with good improvements across the majority of its customer ODIs. Severn Trent's customers have benefitted from best practices learned from Dee Valley; indeed one of the Dee Valley Water team members is now leading the Severn Trent water quality improvement programme.

We are confident that we will once again achieve 4* status from the Environment Agency for our 2017 performance. This will be the second time in three years that we have achieved this, showing we are one of the sector leaders in environmental compliance. We are also proud to have been reaccredited to the Carbon Trust Standard, reflecting our reduction in absolute carbon emissions year by year.

Performance on our end of AMP measures is also encouraging. We are on track to meet our commitments under the Water Framework Directive, and we have made significant progress in improving the health of 1,800 kilometres of river by 2020. Our approach to catchment management has been recognised by the Drinking Water Inspectorate (DWI) as industry leading and has received praise from the Environment Agency, Natural England, local MPs and MEPs.

Ofwat want to see companies find new ways of delivering more of what matters to customers and the environment through innovation. We are looking beyond our sector and internationally for innovation that will help us deliver higher standards and greater efficiency. For example, we are now using bio-augmentation products to prevent the build-up of 'fatbergs' and their use so far has yielded great results. We have further innovation in the pipeline, including detector robots for use in our Water network. Based on technology first developed in North America, this innovative solution uses small touch sensors to spot the nature and exact location of leaks, rather than current visual and acoustic techniques.

Investing responsibly for sustainable growth

The introduction of the totex methodology to the sector has provided a clear incentive for companies to focus on total cost efficiency, creating benefits for both customers and investors through the sharing mechanism. Today, we announce a further £100 million of totex efficiencies, taking our gross efficiencies for AMP6 to £870 million.

We recognise the importance of being an upper quartile company across all of our activities and able to deliver enhanced customer service levels. While the efficiency and performance of our Waste business is widely recognised, our Water business is less strong and so we are committing to reinvest the majority of the additional £100 million of efficiencies to improve Water performance. These investments will include increased monitoring and logging of our network to help identify current issues, the targeting of underperforming assets to improve non-infrastructure asset health and investment in advanced analytics, helping predict and prevent future failures. This investment is in addition to the £120 million previously announced.

Taking account of our £220 million total reinvestment plans, we expect our net totex outperformance versus the Final Determination to be £240 million, of which half will be shared with our customers through lower bills in AMP7.

Investment in our renewable energy programme continues at pace. We have invested around 70% of the £190 million we committed to and in 2017/18, generated the equivalent of 38% of our energy needs, helped by our second food waste anaerobic digestion site near Stourbridge in the West Midlands. As well as providing attractive returns on investment, this site is helping reduce the amount of waste going to landfill and generates a cleaner gas which is directly injected into the national grid. It also acts as a natural hedge against rising energy costs. Construction of our third food waste site in Derby is well advanced, as are two additional thermal hydrolysis plants in our Bioresources business. We remain on-track to reach our 50% self-generation target by 2020, providing a good financial return and a natural hedge in times of rising energy costs.

We're also supporting our customers in their efforts to be more water efficient. We have completed over 15,000 home water efficiency checks, providing advice to customers on how they can save water and money. We have educated over 200,000 customers on key water and waste water efficiency messages.

On our Birmingham Resilience Scheme, we have made great progress on the Lickhill to Frankley pipeline, having installed 18km of the 26km required, and the first section of the new pumping station at Lickhill has been finished. We also completed extensive customer engagement on the second supply. The programme remains on track for the planned completion date.

This year we launched our new Water Resources Management plan which considers the impacts of population growth, environmental obligations and climate change uncertainty, ensuring that we have reliable and sustainable water supplies for all of our current and future customers. The plan includes our proposals to reduce leakage to record low levels, help customers use less water through water efficiency activities and education, and increase the coverage of water meters across the network to reduce consumption and help us better understand water demand patterns.

Resilience isn't just about our assets; we also need a resilient workforce, to ensure that our assets run efficiently and we have the capability to manage incidents effectively. Key to this is having the right technical skills, so we are creating a Severn Trent training academy to make our workforce the most technically skilled in the industry.

Changing the market for the better

Ofwat published its Final Methodology for the 2019 price review in December 2017 and the main changes to the framework came as no surprise, having been well signposted in the preceding months. We are very clear on the opportunities these changes create for top performing companies and have maintained a constructive dialogue with Ofwat throughout the review process on key topics such as cost modelling.

We have made good progress on our PR19 business plan, starting with a deeper understanding of the needs of our customers, which we've used to shape our performance commitments for AMP7. Alongside the 14 common performance commitments defined by Ofwat in their Final Methodology, we have identified a number of bespoke customer performance commitments aligned to areas important to our customers and the environment.

We submitted our proposed PR19 strategic cost adjustments to Ofwat on 3 May 2018. Working with our customers and other stakeholders enabled us to understand key priorities and build up the detailed evidence base required to support the claims. We have identified a number of schemes that we believe should be completed in AMP7 which will address new environmental legislation on abstraction and waste water quality, and improvements to the resilience of customer supplies.

This year we have made excellent progress in establishing a separate Bioresources business unit, which is ready to drive value in the new market. We have taken early action to streamline logistics and optimise our treatment strategy to focus on advanced treatment techniques. We have now created six regional treatment hubs, which are ready to trade with other companies. This process has identified several less efficient sites for closure, which has resulted in £21 million of exceptional charges in 2017/18.

Dee Valley integration is approaching completion following the acquisition in February 2017. We are now realigning Dee Valley Water and Severn Trent Water along national boundaries. Our new Welsh business has been named Hafren Dyfrdwy, meaning Severn Dee. Once the border realignment is complete in July 2018, there will be clearer lines of accountability for both businesses.

For many years we have been championing the importance of financial resilience and strong corporate governance through our Changing Course publications. As a FTSE100 listed company, we meet the strict guidelines on corporate governance, transparency and financial resilience expected of us, and our gearing is broadly in line with Ofwat notional levels. We welcome Ofwat's recent consultation on these subjects and agree with the proposals specified in the consultation, in both spirit and in practice. We consider that they would help the sector address a number of factors that have eroded trust in recent times.

Creating an awesome place to work

We aim to create a place where people enjoy coming to work, where they are safe, fairly rewarded and treated with respect. Our annual employee engagement survey is our key way to gauge this, so we are very proud of the six percentage point increase in engagement scores that we saw this year. This places us seven percentage points higher than the average benchmark for engaged companies in the UK and Ireland.

Our Lost Time Injury (LTI) frequency rate this year was 0.17 per 100,000 hours worked, our best ever performance and a 23% decrease compared to the previous year. We continue on our 'Goal Zero' journey; driving innovation in working practices to further reduce risk exposure and get lost time incidents down to zero. We have also been focused on general well-being, through greater support for employees with mental health issues, and raising awareness of sensitive subjects such as cancer and the menopause.

We believe in our people and encourage them to be the drivers of change in the business. This year, we launched a fund for employees, to pursue projects that will help stimulate innovation. The response has been exciting and we have seen great enthusiasm from our people to seek out innovations and global best practice that may be applied in our business.

Our people are our most valuable assets. We believe investment in technical ability is essential to future-proof our organisation. This starts with our highly regarded apprentice and graduate schemes, but continues right through people's careers at Severn Trent. During the year one of our apprentices, Heeran Basi, was named Apprentice of the Year at the National Apprenticeship Awards, a clear demonstration of the talent we're able to attract and the strength of our programme.

We have embraced the apprentice levy scheme, which came into effect in April 2017 and are committed to spending the full value of the levy on employee training by 2020.

The population in the East and West Midlands is among the least socially mobile in the country. As a major employer in the region, we have an opportunity to drive change and, to this end we've reviewed and made changes to the recruitment process for our graduate scheme. Our recruitment team are also actively targeting schools in government identified social mobility cold spots.

We believe in the benefits of having a diverse workforce which reflects the communities that we serve. We are proud of what we are achieving, particularly with our apprentices and graduates, where 16% of those currently on the scheme are from BAME backgrounds. Gender diversity is also of huge importance, so being placed second among FTSE100 companies by the Hampton-Alexander Review for female representation on our Board was a great achievement. Our mean gender pay gap is one of the lowest in the FTSE100, at just 2.4%, while the median gap is 14.6%, although we strive to reduce this further.

We're pleased to announce that Severn Trent has signed up to the Slave Free Alliance, an organisation set up by Hope for Justice, championing the issues around modern slavery and human trafficking. We've also been working with Hope for Justice and PwC to deliver bespoke training to our employees.

We recognise the importance of the work that WaterAid does and are proud to have them as our corporate charity, this year raising £300,000 for them through a range of events.

We're achieving great things through our 'Community Champions' scheme, which encourages our workforce to support local initiatives by giving each of them two volunteering days to put to good use in our communities. We're working with a number of partners, including the Canal & River Trust and The Wildlife Trust, and so far over 40% of our colleagues have taken part.

Investor Timetable

Ex Dividend Date (Final)

14 June 2018

Record Date (Final)

15 June 2018

AGM

18 July 2018

Q1 Trading Update

18 July 2018

Dividend Payment Date (Final)

20 July 2018

Half Year Results Announcement 2018/19

22 November 2018

Ex Dividend Date (Interim)

29 November 2018

Record Date (Interim)

30 November 2018

Dividend Payment Date (Interim)

4 January 2019

For more information please visit:

https://www.severntrent.com/investors/financial-calendar

Chief Financial Officer's Review

We have delivered a good financial performance in 2017/18, absorbing the upward pressures from sector-wide changes in business rates and energy pass-through costs. In our Regulated Water and Waste Water business, a full year's contribution from Dee Valley Water and higher revenues more than offset the impact of these pressures on our operating costs. In Business Services we have delivered good growth both in revenues and PBIT.

Underlying basic earnings per share increased by 4.6% to 121.0 pence per share in the current year. Reported basic EPS from continuing operations was 102.2 pence.

Our Return on Regulated Equity (RoRE) at 11.5% is 1.5 percentage points higher than the previous year, driven by a strong performance across all three levers - totex, customer ODIs and financing. Last year our RoRE was amongst the best in the sector and we expect to be in a similar position when this year's results for all companies are published in July.

In line with the revised dividend policy announced last year of growth of RPI plus at least 4% per annum, the proposed dividend for the year has increased by 6.2%.

On financing, we have a strong funding position, with all our projected investment and other cash flow needs covered by cash or committed facilities through to March 2020. This year saw the first rate increase from the Bank of England in more than ten years. We actively monitor and manage our interest rate exposure and took steps to hold our proportion of debt at floating rates at 26% through the year end. We are also preparing for the introduction of CPIH indexation in AMP7, entering into CPI/RPI swaps with a notional value of £100 million in the second half of the year, which increased the total amount of these swaps to £150 million at 31 March 2018. And we have entered into a further swap for £100 million since the year end.

We are committed to paying the right amount of tax at the right time. In addition to the corporation tax which is included in our tax charge in the income statement we also pay business rates, employers' national insurance and environmental taxes such as the Climate Change Levy and the Carbon Reduction Commitment. In 2017/18 we incurred £146.5 million in these taxes, charges and levies (2016/17: £146.6 million). Our corporation tax charge for the year was just above the statutory rate of 19% with our cash tax payments reduced by the benefit of allowances on our capital programme, contributions to our pension schemes and 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:

· Groupturnover from continuing operations was £1,694.1 million (2016/17: £1,638.0 million), an increase of 3.4% as Regulated Water and Waste Water revenue increased by 3.0%, mainly due to the RPI-linked tariff increases and a full year of Dee Valley Water, and Business Services' external turnover grew by 9.2%.

· We increased underlying PBIT by 4.0% to £541.0 million (2016/17: £520.1 million). The first full year of Dee Valley Water contributed an additional £5.7 million and, excluding Dee Valley Water, underlying PBIT in our Severn Trent Regulated Water and Waste Water business grew by £14.5 million. Business Services underlying PBIT grew by £3.8 million, offset by a reduction in corporate and other PBIT of £3.7 million.

· We recorded net exceptional costs of £12.6 million (2016/17: credit of £16.6 million). Costs to prepare our Bioresources business for the introduction of the competitive market in 2020 were £20.9 million, partially offset by a credit from the Pension Exchange Arrangement reported at the half year. Reported group PBIT was down as a result by 1.5% to £528.4 million (2016/17: £536.7 million).

· Net finance costs were £219.5 million (2016/17: £205.1 million). Our effective interest rate of 4.5% was up only marginally from 2016/17 (4.4%) despite the impact of higher RPI on our index linked debt.

· Our full effective tax rate was 20.5% and our underlying effective tax rate was 12.7%, down from 16.6% in 2016/17 largely due to higher capital allowances from the larger capital programme in the year.

Regulated Water and Waste Water

Turnover for our Regulated Water and Waste Water business was £1,574.6million (2016/17:£1,528.8million) and underlying PBIT was £514.9million (2016/17: £494.7million).

2018

2017

Better/(worse)

Excluding

Dee Valley

Dee Valley

Total

Excluding

Dee Valley

Dee Valley

Total

Excluding

Dee Valley

£m

£m

£m

£m

£m

£m

£m

%

Turnover

1,546.7

27.9

1,574.6

1,526.6

2.2

1,528.8

20.1

1.3

Net labour costs

(136.4)

(5.4)

(141.8)

(139.8)

(1.0)

(140.8)

3.4

2.4

Net hired and contracted costs

(145.8)

(1.9)

(147.7)

(144.6)

(144.6)

(1.2)

(0.8)

Power

(93.6)

(2.3)

(95.9)

(86.7)

(0.1)

(86.8)

(6.9)

(8.0)

Bad debts

(25.1)

(0.6)

(25.7)

(20.4)

(0.2)

(20.6)

(4.7)

(23.0)

Other costs

(188.1)

(4.8)

(192.9)

(187.7)

(0.6)

(188.3)

(0.4)

(0.2)

(589.0)

(15.0)

(604.0)

(579.2)

(1.9)

(581.1)

(9.8)

(1.7)

Infrastructure renewals expenditure

(134.4)

(0.8)

(135.2)

(136.2)

(136.2)

1.8

1.3

Depreciation

(314.3)

(6.2)

(320.5)

(316.7)

(0.1)

(316.8)

2.4

0.8

Underlying PBIT

509.0

5.9

514.9

494.5

0.2

494.7

14.5

2.9

Dee Valley Water was acquired on 15 February 2017 so this is its first full year in the group. It contributed £27.9million to turnover and £5.9million to underlying PBIT in the year. The following commentary on the Regulated Water and Waste Water business excludes Dee Valley Water and is therefore on a like-for-like basis.

Turnover increased by1.3%, as higher tariffs, including the impact of the annual RPI increase on prices, increased revenue by £33.8 million. Customer ODI rewards earned in 2015/16 increased turnover by £25.8 million but this was offset by a reduction from the Wholesale Revenue Forecasting Incentive Mechanism of £24.5 million arising from revenue billed in excess of the wholesale price control also in 2015/16. Our successful drive to help more vulnerable customers reduced revenue by £4.6 million due to greater take-up of social tariffs. Other movements of £10.4 million (net) including the impact of customers opting for metered status, offset by consumption increases further reduced turnover. In the current year our billed revenue was around £3 million below the wholesale price control and this will be added to revenue to be billed in 2019/20.

Net labour costs were £3.4million (2.4%) lower. Gross employee costs increased by5.3%, due to the annual pay award and our strategy to bring more work in-house. The increase in activity on capital projects resulted in an increase in the level of own labour capitalised, up £16.0million on the previous year.

Net hired and contracted costs were up£1.2million (0.8%).

Power costs were £6.9million higheryear-on-year driven as forecasted by higher pass-through costs, greater consumption from a higher volume of water produced and the costs of responding to incidents. The group manages its power costs through a combination of demand management, self-generation and forward price contracts.

Our bad debt charge increased by £4.7 million this year, and represented 2.2% of household revenue (up from 1.8% last year). In the year we improved cash collections on our current debt, but saw a decline in the amounts collected on older debt - both in accounts collected by us and by other water companies on our behalf. The prudent provisioning we apply to this older debt increased both our charge and the level of bad debt as a percentage of household revenue for the year.

Other costs increased by£0.4million in total after higher profits on disposal of fixed assets (up £5.8 million) offset by higher business rates of around £3 million and other cost increases.

Infrastructure renewals expenditure was £1.8million lowerin the year, at the lower end of our guidance range; we expect to see growth in the programme next year.

Depreciation of £314.3million was £2.4 million lower than the prior year. Our underlying depreciation rate increased in line with our asset base, but the change was lower year on year due to impairments recorded in 2016/17.

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 2018 and for the three years ended on that date is set out in the following table:

2017/18

AMP6 to Date

Base return

5.6%

5.6%

Totex outperformance

0.8%

1.3%

ODI outperformance

2.3%

1.5%

Financing outperformance

2.8%

0.9%

RoRE1

11.5%

9.3%

1 Calculated in accordance with Ofwat guidance set out in RAG 4.07

We have delivered strong returns across the board - with outstanding Customer ODI performance, improved operational and investment efficiency driving totex savings, and continuing outperformance on financing.

Business Services

2018

2017

Increase

(restated)

£m

£m

£m

%

Turnover

Operating Services

78.3

74.4

3.9

5.2

Renewable Energy

60.4

54.0

6.4

11.9

138.7

128.4

10.3

8.0

Underlying PBIT

Operating Services

15.9

12.8

3.1

24.2

Renewable Energy

20.1

19.4

0.7

3.6

36.0

32.2

3.8

11.8

Our Business Services division delivered good growth in revenues (up 8.0%) and underlying PBIT (up 11.8%).

In our Operating Services business, turnover and underlying PBIT increased by £3.9 million and £3.1 million respectively, due in part to higher income from our new contract with plumbing and drainage insurers.

In the Renewable Energy business, turnover increased by 11.9% largely driven by increased generating capacity in the non-regulated business from our new food waste plant at Roundhill. Underlying PBIT increased by 3.6%, with our operating margin impacted by start-up costs in the new plant.

The results above exclude the US Operating Services business, which was sold on 30 June 2017; the Italian Operating Services business (sold on 23 February 2017); and the non-household Retail business (transferred to the Water Plus joint venture during the prior year). All of these businesses have been classified as discontinued operations in the current and previous periods and the results for the previous period have been restated to reflect this.

Corporate and Other

Corporate overheads were £8.9 million (2016/17: £6.9 million) and our other businesses generated a net loss of £0.8 million (2016/17: profit of £0.9 million).

Exceptional items before tax

We recorded a net exceptional charge of £12.6 million (2016/17: credit of £16.6 million).

We have made an early start in preparing our Bioresources business for AMP7. We have developed our business model and identified the actions that we need to take to compete effectively in the new market, determining the lowest cost structure from our existing network of sites, optimising our tanker fleet operations and identifying opportunities for trading in the new market. We have implemented a programme to reorganise the business to deliver our business model, reducing from 20 sites to 12, and as a result incurred exceptional costs of £20.9 million as follows:

· Set up and restructuring costs £2.1 million;

· Write-off of assets that will not be used in the new business £16.8 million; and

· Provision for costs to decommission these assets of £2.0 million.

An exceptional gain of £8.3 million arose (2016/17: gain of £16.6 million) from the net benefit, after implementation costs, of a Pension Increase Exchange arrangement, under which members of the defined benefit schemes will be offered the opportunity at retirement to exchange future non-statutory inflationary increases in a portion of their pensions earned prior to 1997 for a higher pension payment now. In the prior year the exceptional gain arose from a similar exercise for existing pensioners.

Net finance costs

Our net finance costs for the year were £219.5 million, up £14.4 million on the prior year. Our effective cash cost of interest (excluding the RPI uplift on index linked debt and pensions-related charges) was 3.4%, 40 basis points lower than 2016/17. Higher RPI inflation on our index-linked debt (up £23.9 million) and pensions-related charges meant our overall effective interest rate increased marginally year-on-year to 4.5% (2016/17: 4.4%), but still compares favourably to our position at the start of AMP6 (5.4%).

Capitalised finance costs were higher than the prior year due to the increased level of capital activity in the year.

Our earnings before interest, tax depreciation and amortisation (EBITDA) interest cover was 4.3 times (2016/17: 4.3 times) and PBIT interest cover was 2.7 times (2016/17: 2.7 times). See note 17 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 exposure on floating rate borrowings; and

· Exposure to increases in electricity prices.

Accounting rules require that these derivatives are revalued at each balance sheet date and, unless the strict criteria for cash flow hedge accounting are met, the changes in value are taken to the income statement. If the risk that is being hedged does not impact the income statement in the same period 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 period a counterparty requested to terminate four interest rate swaps with a notional principal of £150 million. The fair value of the swaps at termination was a £42.6 million liability and the termination payment was £40.0 million. The gain on termination has been included in finance income.

We hold interest rate swaps with a net notional principal of £251.3 million, fixed to floating, and cross currency swaps with a sterling principal of £98.3 million, which economically act to hedge exchange rate risk on certain foreign currency borrowings. However, the swaps do not meet the hedge accounting rules of IAS 39 and so the changes in fair value are taken to gains/(losses) on financial instruments in the income statement. During the year there was a loss of £12.6 million (2016/17: gain of £11.1 million) in relation to these instruments.

Note 6 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 around 95% of our estimated wholesale energy usage for 2018/19.

Taxation

We are committed to paying the right amount of tax at the right time. As well as corporation tax on profits, which is included in the tax charge in our accounts, we incur a range of taxes, charges and levies imposed by government agencies:

2018

2017

£m

£m

Tax borne:

Corporation tax

26.7

32.4

Business rates and property taxes

82.4

78.8

Employer's National Insurance

23.2

21.6

Climate Change Levy

4.0

3.2

Carbon Reduction Commitment

5.9

6.3

Other taxes

4.3

4.3

146.5

146.6

The corporation tax charge for the year recorded in the income statement was £61.9 million (2016/17: £6.5 million) and we made net corporation tax payments of £6.5 million in the year (2016/17: £21.8 million). The difference between the tax charged and the tax paid is summarised below:

2018

2017

£m

£m

Tax on profit on ordinary activities

61.9

6.5

Tax effect of timing differences

(29.0)

(26.4)

Current tax credits recorded in Other Comprehensive Income or equity

(10.1)

(14.9)

Overprovisions in previous years

3.9

27.4

Impact of rate change

-

39.8

Corporation tax payable for the year

26.7

32.4

Payable by instalments next year

(12.2)

(18.0)

Instalments paid in the year

14.5

14.4

Repayments received

(8.0)

(20.6)

Payments relating to prior years

-

28.0

Net tax paid in the year

6.5

21.8

Tax payments were reduced by £29.0 million (2016/17: £26.4 million) as a result of capital allowances and other timing differences where tax relief is given ahead of the cost being recognised in the income statement.

The total tax incurred was further reduced by £10.1 million (2016/17: £14.9 million) representing tax credits that we receive on charges that are shown in the statement of comprehensive income or equity - the tax for these items is also shown in the statement of comprehensive income or equity so is not included in the income statement charge.

The tax charge includes a credit of £3.9 million (2016/17: £27.4 million) for amounts overprovided in prior years. In 2016/17 there was also a credit of £39.8 million from the impact of adjusting our deferred tax liability to reflect the tax rate reductions announced by the Government to take effect in 2020. These accounting adjustments do not impact the amount payable to HMRC.

Together these amounts represent the corporation tax payable for 2018 of £26.7 million (2016/17: £32.4 million).

Corporation tax liabilities are currently settled in four instalments, two in the year of assessment and two in the following year. In the current year we have paid instalments on this year's tax amounting to £14.5 million (2016/17: £14.4 million) and received repayments of tax overpaid in previous years of £8.0 million (2016/17: £20.6 million), net of the instalments due from 2016/17, resulting in a net tax payment of £6.5 million (2016/17: net payment of £21.8 million including payments of £28.0 million relating to prior years).

Instalments of £12.2 million (2016/17: £18.0 million) are due to be paid to HMRC next year in respect of the current year's liability.

Note 7 in the financial statements sets out the tax charges and credits in the period, which are described in more detail below.

The current tax charge for the year was £32.9 million (2016/17: £19.9 million). In the previous year there was an exceptional credit of £16.4 million from adjustments following agreement with HMRC of prior years' tax matters.

The deferred tax charge before exceptional tax was £29.0 million (2016/17: £22.4million). In the previous year there was an exceptional deferred tax credit of £35.8 million comprising an exceptional charge of £4.0 million following agreement with HMRC of prior years' tax matters and an exceptional credit of £39.8 million arising from a reduction in the corporation tax rate, enacted in that year, to 17% with effect from 1 April 2020.

Our full effective tax rate this year was 20.5% (2016/17: 2.0% after the exceptional tax credits described above). We expect this rate to be close to the corporation tax rate in the UK of 19% (2016/17: 20%) because substantially all of our business is in the UK and the profits of these businesses are chargeable to UK corporation tax.

UK tax rules specify the period over which tax relief can be obtained for capital expenditure. Typically this is a shorter period than that over which the assets are depreciated in the accounts and this tends to reduce the corporation tax charge in the year and the group underlying effective current tax rate. We make provision for tax that will be paid in future periods when the tax relief on the capital expenditure has been received and we receive no allowance for the depreciation charge arising from that expenditure. This is the most significant component of our deferred tax position.

Our underlying effective current tax rate was 12.7% (2016/17: 16.6%).

Profit for the year and earnings per share

Profit for the year from continuing operations decreased by 25.2% to £240.5 million (2016/17: £321.5 million).

The profit for the year from discontinued operations was £13.2 million (2016/17: £21.1 million).

Total profit for the year including discontinued operations was £253.7million (2016/17: £342.6million).

Basic earnings per share from continuing operations decreased by 25.3% to 102.2 pence (2016/17: 136.8 pence). Underlying basic earnings per share was 121.0 pence (2016/17: 115.7 pence). For further details see note 11.

8. Acquisitions

On 15 February 2017, Severn Trent Water Limited acquired 100% of the issued share capital of Dee Valley Group Limited comprising all subsidiaries including the regulated water company Dee Valley Water Limited. This acquisition was made through a scheme of arrangement including cash consideration of £79.0 million and the issue of loan notes with a value of £5.2 million. In the current year a further £0.2 million was paid to acquire shares held by non-assenting shareholders.

The acquisition was accounted for using the acquisition method. Goodwill of £66.0 million was capitalised attributable to the anticipated future synergies 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. Given the proximity to the year end, full detailed fair value exercises were not able to be completed before the approval of the financial statements for the year ended 31 March 2017.

The fair value exercises were completed in the current year and resulted in the revisions to the provisional fair values as set out in the following table.

2018

£m

Goodwill recognised at 1 April 2017 based on provisional fair values

66.0

Additional consideration in respect of acquisition

0.2

Adjustments to provisional fair values for:

Recognition of Dee Valley Water Limited's Instrument of Appointment

(4.3)

Revisions to estimated fair value of Property, plant and equipment

(0.8)

Deferred tax on changes in fair value

1.1

Goodwill recognised at 31 March 2018 based on final fair values

62.2

Details of the adjustments made to the provisional fair values are set out below.

Dee Valley Water Limited holds an Instrument of Appointment as a water undertaker under the Water Act 1989 issued by the Secretary of State for Wales (the Licence). The Licence has no fixed term and requires 25 years notice of termination. Under the Licence, Dee Valley Water Limited has an exclusive right to supply water to household and non-household customers within a geographic area defined in the Licence. On 23 March 2018 Ofwat announced that it had agreed to vary the terms of the Licence with effect from 1 July 2018 to amend the geographic area to include those parts of Wales previously served by Severn Trent Water and to exclude certain parts of England previously served by Dee Valley Water.

Water undertakers are subject to a framework of economic regulation operated by the Water Services Regulation Authority (Ofwat). Under this framework water undertakers are permitted to set wholesale tariffs that would enable an efficient company to earn a post-tax return on a notional amount known as the Regulatory Capital Value (RCV). They are also allowed to earn a net margin on their retail costs. Ofwat sets the post-tax return at a rate that it considers to be the weighted average cost of capital for companies operating in the sector based on an assumed gearing level. Therefore the Licence, together with the net operating assets, enables Dee Valley Water Limited to earn post-tax returns with a net present value equivalent to the RCV plus a net return on retail activities.

To determine the fair value of the Licence we have taken the RCV at 31 March 2017 from Ofwat's Final Price Control Determination published in December 2014 adjusted to current prices at the acquisition date, added an allowance for the value of the Retail business and compared this with the fair value of the operating assets acquired. This resulted in a valuation of £4.3 million for the Licence.

The goodwill acquired represents future outperformance of the regulatory settlement and synergies arising from the combination of the group's regulated water businesses.

9. Discontinued operations

Operating Services US and Italy

The disposal of the group's US business (Operating Services, US), which formed part of the Business Services segment, to US investors PPC Enterprises LLC and Alston Capital Partners LLC was completed on 30 June 2017. The group disposed of the Operating Services business in Italy, which formed part of the Business Services segment, on 23 February 2017 to Acea S.P.A.

Prior period figures in the consolidated income statement and related notes have been restated to present separately amounts relating to discontinued operations, as detailed in the stock market announcement dated 19 July 2017 - 'Trading update for the period 1 April to 19 July 2017'.

Water Plus joint venture

On 1 March 2016 the group announced its intention, subject to approval from the Competition and Markets Authority ('CMA'), to enter into a joint venture with United Utilities PLC to compete in the non-household water and waste water retail markets in England and Scotland. On 3 May 2016 the CMA announced approval of the joint venture. On this date the group determined that completion of the proposed transaction became highly probable and the non-household retail business was classified as a disposal group and discontinued operation with effect from this date. On 31 May 2016 the group transferred Severn Trent Water's non-household retail business to Severn Trent Select Limited and on 1 June it exchanged the entire share capital of Severn Trent Select Limited for 50% of the share capital of Water Plus.

During the year, the remaining balance on the non-household retail receivable amounts that were retained when that business was transferred to Water Plus was written off. An additional £1.5 million was charged to operating costs in discontinued operations in respect of this.

The results of discontinued operations are disclosed separately in the income statement and comprise:

2018

2017

(restated)

Operating Services US

Non-

household retail

Total

Operating Services US

Operating Services Italy

Non-

household retail

Total

(3 months)

(12 months)

(10 months)

(2 months)

£m

£m

£m

£m

£m

£m

£m

Turnover

42.1

42.1

160.4

20.8

66.0

247.2

Total operating costs

(40.7)

(1.5)

(42.2)

(156.0)

(20.2)

(67.3)

(243.5)

(Loss)/profit before interest and tax

1.4

(1.5)

(0.1)

4.4

0.6

(1.3)

3.7

Net finance income

0.9

0.2

1.1

(Loss)/profit before tax

1.4

(1.5)

(0.1)

5.3

0.8

(1.3)

4.8

Attributable tax expense

0.3

0.3

(0.6)

0.3

(0.3)

Gain on disposal of discontinued operations

13.0

13.0

2.0

14.6

16.6

Profit/(loss) for the year

14.4

(1.2)

13.2

4.7

2.8

13.6

21.1

Attributable to:

Owners of the company

14.4

(1.2)

13.2

4.7

3.0

13.6

21.3

Non-controlling interests

(0.2)

(0.2)

14.4

(1.2)

13.2

4.7

2.8

13.6

21.1

Basic and diluted earnings per share from discontinued operations are as follows:

2018

2017

(restated)

Profit attributable to owners of the company

Weighted average number of shares

Per share amount

Profit attributable to owners of the company

Weighted average number of shares

Per share amount

£m

m

pence

£m

m

pence

Basic earnings per share

13.2

235.3

5.6

21.3

235.0

9.1

Diluted earnings per share

13.2

236.1

5.6

21.3

236.0

9.0

Net cash flows arising from the discontinued operations in the year were:

2018

2017

(restated)

Operating Services US

Operating Services US

Operating Services Italy

Non

household retail

Total

(3 months)

(12 months)

(10 months)

(2 months)

£m

£m

£m

£m

£m

Net cash flows attributable to:

- Operating activities

1.9

5.1

(0.7)

2.9

7.3

- Investing activities

(0.6)

(3.7)

0.4

(3.3)

- Financing activities

(1.1)

1.1

(3.5)

(3.5)

1.3

0.3

0.8

(0.6)

0.5

The net gain on disposals are calculated as follows:

2018

2017

Operating Services US

Operating Services Italy

Non

household retail

£m

£m

£m

Consideration

47.8

7.9

25.5

Net assets attributable to owners of the company

(45.5)

(7.1)

(3.6)

2.3

0.8

21.9

Tax on gain on disposal

(0.7)

Disposal costs and provisions on disposal

(18.4)

(1.6)

(7.3)

Foreign exchange gain recycled from reserves

29.8

2.8

Net gain on disposal

13.0

2.0

14.6

The net assets of the businesses at the date of disposal were:

2018

2017

Operating Services US

Operating Services Italy

Non-household retail

£m

£m

£m

Goodwill

14.4

2.0

Other intangible assets

2.9

1.4

Property, plant and equipment

9.4

1.2

Investments

4.2

Inventories

0.6

7.5

Trade and other receivables

28.2

11.3

0.6

Cash and bank balances

9.9

1.5

3.5

Trade and other payables

(19.9)

(15.0)

(0.5)

Borrowings

(3.9)

Provisions for liabilities

(2.3)

45.5

7.9

3.6

Attributable to:

Owners of the company

45.5

7.1

3.6

Non-controlling interest

0.8

45.5

7.9

3.6

The net cash flows arising from disposals were:

Operating Services US

Operating Services Italy

Non-household retail

£m

£m

£m

Consideration received in cash and cash equivalents

39.3

0.3

Settlement of intercompany loans

7.6

Disposal costs paid in cash and cash equivalents

(4.6)

(1.6)

(7.3)

Cash and bank balances disposed of

(9.9)

(1.5)

(3.5)

24.8

4.8

(10.8)

10. Dividends

Amounts recognised as distributions to owners of the company in the period:

2018

2017

Pence per share

£m

Pence per share

£m

Final dividend for the year ended 31 March 2017 (2016)

48.90

115.2

48.40

114.0

Interim dividend for the year ended 31 March 2018 (2017)

34.63

81.8

32.60

76.4

Total dividends paid

83.53

197.0

81.00

190.4

Proposed final dividend for the year ended 31 March 2018

51.92

122.7

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.

11. 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 period, excluding those held in the Severn Trent Employee Share Ownership Trust which are treated as cancelled.

For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares. These represent share options granted to employees where the exercise price is less than the average market price of the company's shares during the period.

Basic and diluted earnings per share from continuing and discontinued operations are calculated on the basis of profit from continuing and discontinued operations attributable to the owners of the company.

The calculation of basic and diluted earnings per share is based on the following:

Earnings for the purpose of basic and diluted earnings per share from continuing operations

2018

2017

(restated)

£m

£m

Profit for the period attributable to owners of the company

253.7

342.8

Adjusted for profit from discontinued operations attributable to owners of the company

(13.2)

(21.3)

Profit for the period from continuing operations attributable to owners of the company

240.5

321.5

Number of shares

2018

2017

m

m

Weighted average number of ordinary shares for the purpose of basic earnings per share

235.3

235.0

Effect of dilutive potential ordinary shares:

- share options and LTIPs

0.8

1.0

Weighted average number of ordinary shares for the purpose of diluted earnings per share

236.1

236.0

b) Underlying earnings per share

2018

2017

(restated)

pence

pence

Underlying basic earnings per share

121.0

115.7

Underlying diluted earnings per share

120.6

115.2

Underlying earnings per share figures are presented for continuing operations. These exclude the effects of exceptional items, net gains/(losses) on financial instruments, current tax on exceptional items and on net gains/(losses) on financial instruments and deferred tax in both 2018 and 2017. 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 are as follows:

2018

2017

(restated)

£m

£m

Earnings for the purpose of basic and diluted earnings per share from continuing operations

240.5

321.5

Adjustments for:

- exceptional items before tax

12.6

(16.6)

- current tax related to exceptional items

(0.7)

(0.1)

- net losses on financial instruments

6.7

1.8

- current tax on net losses on financial instruments

(3.3)

(4.9)

- exceptional current tax

(16.4)

- deferred tax

29.0

(13.4)

Earnings for the purpose of underlying basic and diluted earnings per share

284.8

271.9

12. Retirement benefit schemes

The group operates three defined benefit schemes in the UK, two from Severn Trent and one from Dee Valley Water. The Severn Trent schemes are closed to future accrual. The group also has an unfunded obligation to provide benefits to certain former employees whose earnings were in excess of the pensions cap that operated when the benefits were accrued. The most recent actuarial valuation of the Severn Trent schemes was at 31 March 2016. Dee Valley Water participates in the Dee Valley Water Limited Section of the Water Companies Pension Scheme, which is a defined benefit sectionalised scheme. The most recent actuarial valuation of this scheme was at 31 March 2017.

The assumptions used in calculating the defined benefit obligations as at 31 March 2018 have been updated to reflect market conditions prevailing at the balance sheet date as follows.

2018

2017

%

%

Price inflation - RPI

3.1

3.1

Price inflation - CPI

2.1

2.1

Discount rate

2.7

2.7

Pension increases in payment

3.1

3.1

Pension increases in deferment

3.1

3.1

2018

2017

Remaining life expectancy for members currently aged 65 (years)

- men

22.4

22.5

- women

24.1

24.1

Remaining life expectancy for members currently aged 45 upon retirement at 65 (years)

- men

23.4

23.6

- women

25.3

25.3

The calculation of the scheme liabilities is sensitive to the actuarial assumptions and in particular to the assumptions relating to discount rate, price inflation and mortality. The following table summarises the estimated impact on scheme liabilities from changes to key actuarial assumptions whilst holding all other assumptions constant.

Assumption

Change in assumption

Impact on scheme liabilities

Discount rate

Increase/decrease by 0.1% pa

Decrease/increase by £48 million

Price inflation

Increase/decrease by 0.1% pa

Increase/decrease by £43 million

Mortality

Increase in life expectancy by 1 year

Increase by £107 million

The defined benefit assets have been updated to reflect their market value as at 31 March 2018. Actuarial gains and losses on the scheme assets and defined benefit obligations have been reported in the statement of comprehensive income. Service cost, and the cost of administrating the scheme, are recognised in operating costs and interest cost is recognised in net finance costs.

Movements in the net deficit recognised in the balance sheet were as follows:

Fair value

of plan assets

Defined

benefit

obligations

Net deficit

£m

£m

£m

At 1 April 2017

2,352.8

(2,927.4)

(574.6)

Exceptional past service credit

-

8.3

8.3

Current service cost

-

(0.5)

(0.5)

Scheme administration costs

(1.8)

-

(1.8)

Interest income/(cost)

62.0

(77.5)

(15.5)

Return on plan assets

(1.3)

-

(1.3)

Actuarial gains recognised in the statement of comprehensive income

-

30.4

30.4

Contributions from the sponsoring companies

35.2

-

35.2

Employees' contributions and benefits paid

(107.1)

107.1

-

At 31 March 2018

2,339.8

(2,859.6)

(519.8)

The net deficit is presented on the balance sheet as follows:

2018

2017

£m

£m

Retirement benefit surplus

18.2

9.8

Retirement benefit obligations

(538.0)

(584.4)

(519.8)

(574.6)

13. Cash flow

a) Reconciliation of operating profit to operating cash flows

2018

2017

(restated)

£m

£m

Profit before interest and tax from continuing operations

528.4

536.7

Profit before interest and tax from discontinued operations

13.6

20.6

Profit before interest and tax

542.0

557.3

Depreciation of property, plant and equipment

308.8

308.8

Amortisation of intangible assets

20.8

19.3

Pension service credit

(7.8)

(17.3)

Defined benefit pension scheme administration costs

1.8

3.3

Defined benefit pension scheme contributions

(35.2)

(33.2)

Share based payment charge

6.9

6.1

Profit on sale of property, plant and equipment and intangible assets

(7.3)

(5.0)

Exceptional depreciation - property, plant and equipment

16.8

Profit on disposal of businesses

(13.7)

(17.2)

Deferred income movement

(14.3)

(13.9)

Provisions charged to the income statement

13.8

16.5

Utilisation of provisions for liabilities and charges

(5.4)

(10.5)

Operating cash flows before movements in working capital

827.2

814.2

Increase in inventory

(2.9)

(1.3)

(Increase)/decrease in amounts receivable

(58.4)

60.3

Increase/(decrease) in amounts payable

7.4

(22.2)

Cash generated from operations

773.3

851.0

Tax received

8.0

20.6

Tax paid

(14.5)

(42.4)

Net cash generated from operating activities

766.8

829.2

b) Non-cash transactions

No additions to property, plant and equipment during the year were financed by new finance leases (2017: nil). Assets transferred from developers and under Private Drains and Sewers legislation at no cost were recognised as their fair value of £35.3 million (2017: £51.4 million).

c) Exceptional cash flows

The following cash flows arose from items classified as exceptional in the income statement:

2018

2017 (restated)

£m

£m

Costs of Pension Exchange Arrangement

(0.7)

d) Reconciliation of movements in net debt

Net cash and cash equivalents

Bank loans

Other loans

Finance leases

Cross currency swaps

Loans due from joint ventures

Net debt

£m

£m

£m

£m

£m

£m

£m

As at 1 April 2017

44.6

(1,073.3)

(4,090.0)

(115.7)

43.4

108.6

(5,082.4)

Cashflow

(4.6)

(138.5)

(98.1)

1.8

26.6

(212.8)

Fair value adjustments

2.0

(18.9)

(16.9)

RPI uplift on index-linked debt

(4.4)

(49.7)

(54.1)

Foreign exchange

(1.5)

12.7

11.2

Other non-cash movements

(1.2)

(0.8)

0.4

(1.6)

As at 31 March 2018

38.5

(1,217.4)

(4,223.9)

(113.9)

24.5

135.6

(5,356.6)

Liabilities from financing activities comprise bank loans, other loans and finance leases.

14. Post balance sheet events

Sale of Land in Nottinghamshire

On 30 April 2018, the sale of land from Midlands Land Portfolio Limited, a subsidiary of Severn Trent Plc, to Persimmon Homes was completed. The sale values the land at £21.8 million, realising a group profit of £18.2 million in the year ending 31 March 2019.

Payments will be made in cash and phased over the life of the project with £2.3 million payable on 30 April 2018 and the remainder phased evenly over five further yearly payments of £3.9 million each ending on 30 April 2023.

Dividends

Following the year end the board of directors have approved a final dividend of 51.92 pence per share. Further details of this are shown in note 10.

15. Contingent liabilities

Bonds and guarantees

Group undertakings have entered into bonds and guarantees in the normal course of business. No liability (2017: £nil) is expected to arise in respect of either bonds or guarantees.

16. 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.

Water Plus

2018

2017

£m

£m

Sale of services

354.9

317.5

Net interest income

2.2

1.3

357.1

318.8

Outstanding balances between the group and the joint venture as at 31 March were as follows:

Water Plus

2018

2017

£m

£m

Trade and other receivables due from related parties

44.9

37.6

Amounts due to related parties

-

(8.8)

Loans receivable from joint ventures

135.6

108.6

180.5

137.4

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 12.

17. Alternative performance measures

Financial measures or metrics used in this report that are not defined by IFRS are alternative performance measures. 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.

a) Exceptional items

Exceptional items are income or expenditure, which individually or, if of a similar type, in aggregate should, in the opinion of the directors, be disclosed by virtue of their size or nature if the financial statements are to give a true and fair view. In this context, materiality is assessed at the segment level.

b) Underlying PBIT

Underlying profit before interest and tax is profit before interest and tax excluding exceptional items as recorded in the income statement and restated for discontinued operations. This provides a consistent measure of operating performance excluding distortions caused by exceptional items. The calculation of this AMP is shown on the face of the income statement and in note 2 for reportable segments.

c) Underlying earnings per share

Underlying earnings per share figures are presented for continuing operations. These exclude the effects of exceptional items, net gains/(losses) on financial instruments, current tax on exceptional items and on net gains/(losses) 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 11.

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 13.

e) Effective interest rate

The effective interest rate is calculated as net finance costs, excluding net finance costs from pensions, plus capitalised finance costs divided by the monthly average net debt during the year.

(net finance costs - net finance costs from pensions + capitalised finance costs)

(monthly average net debt)

2018

2017

(restated)

£m

£m

Net finance costs

219.5

205.1

Net finance costs from pensions

(15.5)

(10.9)

Capitalised interest

26.2

18.6

230.2

212.8

Average net debt

5,134.4

4,812.5

Effective interest rate

4.5%

4.4%

This APM is used as it shows the average interest rate that is attributable to the net debt of the business.

f) Effective cash cost of interest

The effective cash cost of interest is calculated on the same basis as the effective interest rate except that it excludes finance costs that are not paid in cash but are accreted to the carrying value of the debt (principally RPI adjustments on index-linked debt).

(net finance costs - net finance costs from pensions - RPI interest + capitalised finance costs)

(monthly average net debt)

2018

2017

(restated)

£m

£m

Net finance costs

219.5

205.1

Net finance costs from pensions

(15.5)

(10.9)

RPI interest

(54.1)

(30.2)

Capitalised interest

26.2

18.6

176.1

182.6

Average net debt

5,134.4

4,812.5

Effective cash cost of interest

3.4%

3.8%

This is used as it shows the average cash interest rate based on the net debt of the business.

g) PBIT interest cover

The ratio of profit from continuing operations before interest, tax and exceptional items to net finance costs excluding net finance costs from pensions.

Underlying PBIT

(net finance costs - net finance costs from pensions)

2018

2017

(restated)

£m

£m

Underlying PBIT

541.0

520.1

Net finance costs

219.5

205.1

Net finance costs from pensions

(15.5)

(10.9)

Net finance costs excluding finance costs from pensions

204.0

194.2

ratio

ratio

PBIT interest cover ratio

2.7

2.7

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 from continuing operations before interest, tax, exceptional items, depreciation and amortisation to net finance costs excluding net finance costs from pensions.

(underlying PBIT + depreciation + amortisation)

(net finance costs - net finance costs from pensions)

2018

2017

(restated)

£m

£m

Underlying PBIT

541.0

520.1

Depreciation

308.2

305.9

Amortisation

20.5

17.8

EBITDA

869.7

843.8

Net finance costs

219.5

205.1

Net finance costs from pensions

(15.5)

(10.9)

Net finance costs excluding finance costs from pensions

204.0

194.2

ratio

ratio

EBITDA interest cover ratio

4.3

4.3

This is used to show how the EBITDA of the business covers the financing costs associated only with net debt on a consistent basis.

i) Underlying effective current tax rate

Current tax charge for the year on continuing operations, excluding prior year charges, exceptional current tax, and current tax on exceptional items and on financial instruments, divided by profit from continuing operations before tax, net losses on financial instruments, exceptional items and share of net profit of joint ventures accounted for using the equity method.

(Current year current tax charge in the income statement - tax on exceptional items - tax on financial instruments)

(PBT - share of net profit of JVs - exceptional items - net losses on financial instruments)

2018

2017

(restated)

Current tax thereon

Current tax thereon

£m

£m

£m

£m

Profit before tax

302.4

(36.8)

328.0

(47.3)

Adjustments:

Share of net (profit)/loss of joint ventures accounted for using the equity method

(0.2)

1.8

Exceptional items

12.6

(0.7)

(16.6)

(0.1)

Net losses on financial instruments

6.7

(3.3)

1.8

(4.9)

321.5

(40.8)

315.0

(52.3)

12.7%

16.6%

This APM is used to remove distortions in the underlying tax charge and create a metric consistent with the calculation of underlying earnings per share in note 11. Share of net (profit)/loss of joint ventures is excluded from the calculation because this is included after tax and the tax on joint venture results is therefore not included in the current tax charge.

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Severn Trent plc published this content on 23 May 2018 and is solely responsible for the information contained herein. Distributed by Public, unedited and unaltered, on 23 May 2018 06:17:15 UTC