Severn Trent Regulatory News (SVT)

Preliminary Announcement of Annual Results

24 May 2016

Results for the year to 31 March 2016

A promising start to the new regulatory period

· Group financial results in line with expectations and reflect a promising start to the AMP61:

· Group turnover of £1,787 million, down 0.8% year-on-year due to regulated price decrease

· Group underlying PBIT2 of £523 million, down 3.2%

· Group reported PBIT £524 million up 0.4%

· Return on Regulatory Equity (RoRE) of 8.4%3

· Underlying basic EPS2 of 108.7p

· Final dividend of 48.40p, in line with dividend policy, taking the 2015/16 dividend to 80.66p

· Customers remain at the heart of our business:

· Lowest combined average bills in Britain - £329 in 2016/17, flat year-on-year

· Doubled the number of vulnerable customers supported

· Customer complaints down 28% year-on-year

· Delivering on our levers of outperformance:

· ODIs: net reward of £23.2 million3

· Efficiencies: now forecasting £670 million of totex efficiencies4 across AMP6. Equates to £260 million outperformance; ~50% of this (£120 million) to be reinvested for the benefit of customers

· Totex: 2015/16 Wholesale totex4 of £1,017 million, £38 million lower than Final Determination

· Energy: now generating equivalent of 33% of energy needs through our renewables programme; on track for 50% by 2020

· Financing: effective interest rate reduced by 90 basis points to 4.5%

· Sector-leading environmental performance again - provisional Environment Agency 4* rating

· Water Plus joint venture established with United Utilities to deliver a market-leading non-household retail offer when the market opens for competition in 2017

1. AMP6 - Asset Management Plan regulatory period 2015 to 2020

2. Underlying Profit before Interest and Tax (PBIT) excludes exceptional operating items. Underlying Earnings per Share (EPS) is set out in note 9 to the financial statements

3. RoRE at 2012/13 prices, and ODIs quoted pre-tax at 2012/13 prices

4. Efficiencies and totex costs quoted at actual and forecast nominal prices

5. FD = Final Determination

Liv Garfield, Chief Executive Severn Trent Plc, said:

"Putting our customers at the heart of our business has led to a promising start to the current regulatory period.

We continue to drive down costs and have the lowest combined bills in Britain, with our customers paying on average less than a pound a day for their water and waste water services. Further efficiencies are also allowing us to invest even more for the long-term benefit of our customers and shareholders.

Our performance continues to improve with customer complaints down 28% year-on-year. We still lead the sector on waste water and have made strong progress in areas such as internal sewer flooding that is down 31%. These achievements are a credit to the hard work of my colleagues, who are truly embracing our customer-focused culture.

There remains more to do to ensure that we are consistently achieving a great customer service every day, and I am confident that we have the momentum and plans in place to achieve this."

1. Profit Before Interest and Tax (PBIT) before exceptional items (see note 3)

2. Profit Before Tax (PBT) before exceptional items and gains/losses on financial instruments

3. Before exceptional items, gains/losses on financial instruments and deferred tax

Note: FY2016/17 technical guidance is included in the Chief Financial Officer's section of this RNS

Interim Results Presentation and Webcast

There will be a presentation of these results at 9:30am BST on Tuesday 24 May at Rothschilds 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

The beginning of the current regulatory period, AMP6, brought considerable uncertainty, driven by changes to the regulatory regime which shifted the balance of risk and reward. This has created opportunities for companies to outperform the allowed regulatory return by delivering benefits to customers and the environment.

We have made a promising start to this AMP but equally we know there is more to be done. Our new customer-focused culture is being embedded in the organisation and we believe the changes we have implemented over the past two years set us on the right trajectory.

We continue to place emphasis on 'our winning formula', shown below, as the driving force behind our actions:

· Customers at the heart of our business

· Operational excellence

· Winners in a world of incentivisation

· At the frontier of sector efficiency

· Standard setters in renewable energy

· Successful in competitive markets

Customers at the heart of our business

Given our position as a regional monopoly, it is imperative that we put customers at the heart of our decision making process, ensuring that their needs and circumstances are reflected in our actions.

Our customers continue to benefit from the lowest combined average bills in the UK at £329 per annum, which are flat year-on-year. We have also more than doubled the number of vulnerable customers who benefit from our payment assistance initiatives, and we've worked hard to reduce customer complaints, which are down 28% year-on-year. 

We have implemented a range of new digital services to help customers access information when they need it, for example our new 'Track My Job' app keeps customers up to date on the progress of any work. We will continue to expand our range of digital services, including a refresh of our corporate website later this year.

We continue to improve our Service Incentive Mechanism (SIM) score which measures customer service but have more work to do to improve our performance from our mid-table position. Our aspiration is to be the leader in customer experience in our industry.

Operational excellence

We have remained the sector leader in waste water efficiency and delivered good performance on key metrics, such as internal sewer flooding that is down 31%. We have done this while achieving high environmental standards, reflected in our provisional Environment Agency (EA) 4* rating for the second time in three years. Underpinning this was our performance on some key environmental metrics, including a 21% reduction in the number of category 3 pollution incidents and an 80% reduction in the number of serious pollution incidents.

In Water, we started the AMP knowing we needed to improve and we have established a clear action plan to do this. The changes will not come overnight but we are ambitious in our targets and expect to report positive outcomes in due course. On the positive side we have seen reductions of 62% since last year in coliform detections, and water-quality complaints have been resolved 85% faster than the prior year.

On the downside there were some high profile events which left customers unable to access their water. We are learning from these to continually improve our processes and systems.

Winners in a world of incentivisation

The new regulatory environment incentivises companies to outperform the allowed regulatory return through mechanisms including Outcome Delivery Incentives (ODIs).

We have chosen to take the majority of ODI rewards or penalties in AMP through bills, rather than on RCV at the end of the AMP. The targets we agreed with Ofwat were very challenging, requiring a significant step change in our performance levels to avoid penalties. We are therefore pleased to report a net real reward of £23.2 million (at 2012/13 prices) in the first year of the AMP.

We have incentivised our workforce and key contractors through our ODI-linked employee bonus scheme and performance-based incentive contracts.

ODI targets for the rest of the AMP continue to get tougher. We are responding to this challenge, including for example further multi-skilling in our contact centres to enhance customer service, and initiatives geared to improving and sustaining reductions in leakages, pollutions and flooding. As a result of these plans, we are targeting £15 million of net ODI rewards for 2016/17 (at 12/13 prices).

Ofwat also incentivises companies to seek the lowest cost of finance to enable them to outperform the regulatory allowed cost of debt. We remain focused on sourcing sustainable, low-cost, long-term finance from a range of sources, all supported by an investment grade credit rating. We have reduced our effective cost of debt from 5.4% at the end of 2014/15, to 4.5% this year, and we have taken advantage of low interest rates by moving a greater proportion of our debt to floating rates. We see further opportunities to reduce interest costs through refinancing existing debt and raising new debt to finance our investment plans.

Outperformance in ODIs, totex and financing all translates into our Return on Regulated Equity (RoRE) which for 2015/16 is 8.4%.

At the frontier of sector efficiency

We have set ourselves clear efficiency targets to maintain our number one position in waste water and ensure that we end AMP6 towards the upper quartile of peer companies in water.

We are pleased to share today our forecast for totex savings across AMP6 of £670 million (at nominal prices). This includes the £372 million (at 2012/13 prices, £410 million at nominal prices) of savings announced in November to reach the final determination level of totex; a further £80 million (nominal) of savings locked in today, and an additional £180 million (nominal) that we are confident in delivering over the remainder of the AMP. Efficiencies have been achieved across our operational and capital investment activities, through innovation, smarter procurement and tighter cost control.

We are committed to investing not only for today but also for future generations and as such have decided to reinvest around half (or £120 million) of the forecast £260m of totex outperformance into areas that are important to our customers, such as improving water quality, enhancing security, and assisting vulnerable customers.

Our largest capital programme, the Birmingham Resilience scheme, is progressing well and remains on track for on-time delivery to budget. We invited tenders for two elements of the scheme: the first, for the river inlet pumping station and new cross-country water main, has now been awarded, with the second, the new treatment processes at Frankley Water Treatment Works, expected to be awarded in July 2016.

Standard setters in renewable energy

Our renewable energy programme remains core to our strategy, combining a responsible approach to the environment with good financial sense. All our programmes are targeted with delivering double-digit post-tax rates of return on investment.

With energy being our second largest direct cost, we are focused on using less, generating more, and paying the lowest energy prices.

We have previously announced that we plan to invest up to £190 million in renewables across AMP6. This year we have increased renewable energy generation by 17% (44GWh) meaning that we now generate energy equivalent to 33% of our own energy needs. We remain on track for 50% by 2020.

Successful in competitive markets

The arrival of non-household retail competition in 2017 is the first major step towards competition in our regulated business.

Our new 'Water Plus' joint venture (JV) with United Utilities will combine the complementary skills of both companies, including sales, customer service, business strategy and credit management, to deliver an attractive proposition for large and small business customers across England and Scotland.

Investor Timetable

Chief Financial Officer's Review

The group has delivered strong financial results in the first year of the new AMP. Our Regulated Water and Waste Water business has performed well, with reduced operating costs helping to offset the impact of the lower prices we agreed in the final determination. Business Services has delivered growth in both sales and underlying PBIT1 this year and has made good progress in renewable energy generation and with the formation of the joint venture, Water Plus, we have made good progress in getting ready for non-household retail competition in England.

We saw the benefits of our rebalanced financing strategy, increasing the proportion of our debt that is at floating rates, which has helped to deliver a £30.7 million reduction in financing costs year on year. Our effective interest rate for the year was 4.5%.

Our underlying tax rate was 18.5% (2014/15: 17.6%).

A brief summary of our financial performance for the year is as follows:

· Group turnover from continuing operations was £1,786.9 million (2014/15: £1,801.3 million), a decrease of £14.4 million or 0.8% reflecting primarily £31 million lower regulated revenues following the agreed price reduction in the Final Determination.

· Underlying PBIT1 of £522.8 million (2014/15: £540.3 million) was £17.5 million lower as the reduction in turnover in regulated water and waste water was partially offset by lower operating costs in the regulated business and increased operating profits in our non-regulated business.

· Reported group PBIT1 was £523.8 million (2014/15: £521.6 million).

· We recorded an exceptional credit of £1.0 million from the release of a prior year provision (2014/15: charge of £18.7 million).

· Net finance costs were £209.3 million (2014/15: £240.0 million).

1. PBIT is profit before interest and tax; underlying PBIT excludes exceptional items as set out in note 3

Changes to segmental presentation

The group is now organised into two main business segments, "Regulated Water and Waste Water" and "Business Services".

· Regulated Water and Waste Water comprises Severn Trent Water's wholesale operations and household retail activities and related support functions.

· Business Services comprises the Operating Services businesses in the USA, UK, Ireland and Italy, the group's renewable energy business and Severn Trent Water's non-household retail business.

The Water Purification business, which was sold on 2 July 2015, has been treated as a discontinued operation.

The tables below reconcile our results for the year ended 31 March 2016 under the old segmental basis (Severn Trent Water, Severn Trent Services, and Corporate and Other) to the new basis.

The new segments reflect the way we organise and manage the group. Our renewable energy business, including the electricity and gas generating assets owned by Severn Trent Water's regulated business, is now all managed in Business Services. We transferred management responsibility for non-household retail to Business Services, in preparation for further competition in these activities from April 2017. This created a clear separation between our regulated wholesale and non-regulated retail activities.

On 3 May 2016 the Competition and Markets Authority ('CMA') announced clearance of the proposal to form the Water Plus joint venture with United Utilities PLC. On that date the disposal of the non-household retail activities to Water Plus became highly probable and these activities were reclassified as a discontinued operation and equity accounted. However, as this transaction was still subject to CMA approval at 31 March 2016, the results of the non-household retail activities are included in continuing operations in these financial statements.

Comparative financial information for the 2014/15 on the new basis is not available across all segments and so the commentary that follows describes year on year performance on the old basis.

Regulated Water and Waste Water

Turnover for the new Regulated Water and Waste Water segment was £1,506.1 million and underlying PBIT was £492.1 million.

On a like for like basis, turnover decreased by £31.0 million. The price reduction in our Final Determination reduced turnover by £30.2 million. This was partially offset by growth from new customers and consumption increases of £6.7 million. Tariff mix and other effects reduced turnover by £7.5 million. Underlying PBIT decreased by £18.7 million as lower operational costs partially offset the decline in turnover.

Within our 2015/16 revenue, there is around £11.5 million of over-billing against the Final Determination as a result of higher consumption and growth in our customer base; this, together with a small penalty of about £0.5 million for being outside the forecasting corridor, will be returned to customers through adjusted bills in 2017/18.

Net labour costs were 8.9% lower. The benefits of the reorganisation carried out at the end of 2014/15 and the closure of the defined benefit pension scheme to future accrual more than offset the costs of the new employee incentive scheme.

Hired and contracted costs increased by £8.5 million. This is partly due to costs incurred in preparation for market opening including an increase in contributions to Open Water. In addition, we have seen an increase in distribution and tankering costs in our waste business and have paid a bonus to our supply chain for support on delivering our strong ODI performance.

Bad debt charges improved to 1.5% of turnover - down from 1.8% in 2014/15 as a result of improved collection performance on amounts billed in the year and better management of aged debt balances. The provision level against our household debt is typically higher than for non-household debt and we therefore expect that after the transfer of our non-household business to Water Plus, this ratio will increase.

Power costs decreased by £2.1 million mainly due to the benefit of a full year of biogas to grid generation. We continue to make good progress on our renewable energy generation, and self-generated the equivalent of 33% of gross consumption in the year, providing an increasingly effective hedge against energy price volatility.

Material and Other costs were £2.6 million lower year-on-year. Higher costs in particular on business rates and abortive capital write offs were more than offset by the £4.4m refund from the Environment Agency at half year, and second-half gains on property disposals were in line with those for the first half.

Depreciation increased by £11.3 million, primarily due to the growing asset base and an accelerated charge of £3.6 million arising from the decommissioning of older assets as part of our water quality improvement programme. Infrastructure maintenance expenditure was £8.8 million lower due to a lower level of activity at the start of the year, and improved efficiencies in delivering the programme, as highlighted in our interim results.

Return on Regulatory Equity (RoRE)

A key indicator of the performance of the regulated business is the Return on Regulatory Equity or "RoRE". Outperformance against the Final Determination for totex, ODIs and financing is included in RoRE.

Profits reported under IFRS do not reflect all of the regulatory impacts in the year of performance and may reflect the impacts of performance in previous years.

Severn Trent Water's RoRE for the year ended 31 March 2016 is set out in the following table:

1. Based on RCV of £7,324 million in 2012/13 prices

2. Per Final Determination

3. Company share of totex outperformance in the year

4. Company assessment of performance, subject to Ofwat review process in Autumn 2016

5. Based on actual financing cost and actual gearing

6. Includes non-household revenue, land sales and disposals, other income and the Wholesale Revenue Forecasting Incentive Mechanism

Severn Trent Water's totex benefit to RoRE, after taking account of sharing with customers was £19 million in 2012/13 prices after tax.

Our assessment of performance on our Outcome Delivery Incentives ("ODI"s) will be published in Severn Trent Water Limited's Annual Performance Report in July. We earned a net reward for performance in 2015/16 of £23.2 million before tax at 2012/13 prices, which is subject to the Ofwat review process in Autumn 2016. All of this relates to "in AMP" measures, which will be reflected in increased prices that we will set for 2017/18.

Severn Trent Water's financing costs in 2015/16 were £40 million lower than the Final Determination in 2012/13 prises after tax. This is due to the impact of lower inflation on our index linked debt and nominal interest rates achieved lower than assumed in the Final Determination - a consequence of low market interest rates and savings arising from our AMP6 financing activities. In addition, we have a lower debt requirement than assumed in the Final Determination.

Business Services

Turnover for the new Business Services segment was £674.6 million and underlying PBIT was £38.2 million.

Turnover and underlying PBIT on a like for like basis at actual exchange rates and on a constant currency basis are shown below:

The results above exclude the Water Purification business, which was classified as a discontinued operation in 2014/15.

In our Operating Services business we saw good growth in turnover, up 3.8% on a constant currency basis to £233.2 million, mainly due to contract gains and additional work in our UK business. Underlying PBIT was up £1.1 million to £10.7 million with higher profits across all regions.

Corporate and other

Corporate overheads totalled £10.6 million (2014/15: £13.4 million). Our other businesses generated a net profit of £2.4 million (2014/15: £1.2 million).

Exceptional items before tax

There was an exceptional operating credit of £1.0 million arising from the release of a provision originally recorded as an exceptional charge (2014/15: charge of £18.7 million).

Net finance costs

The group's net finance costs were £209.3 million, down from £240.0 million in the prior year. The reduction resulted from the actions we took at the end of the 2015 financial year to increase our exposure to floating rates, lower costs achieved on new floating rate debt and lower finance costs on our index linked debt as a result of lower inflation in the year. Finance costs capitalised were £3.3 million lower mainly due to the lower finance cost incurred.

The effective interest rate, including index linked debt, for the year ended 31 March 2016 was 4.5% (2014/15: 5.4%). The effective cash cost of interest (excluding the RPI uplift on index linked debt) was 4.2% (2014/15: 4.9%).

The group's net interest charge, excluding gains/(losses) on financial instruments and net finance costs from pensions, was covered 4.3 times (2014/15: 3.7 times) by profit before interest, tax, depreciation and exceptional items, and 2.7 times (2014/15: 2.4 times) by underlying PBIT.

Gains/(losses) on financial instruments

The group uses financial derivatives solely to hedge risks associated with its normal business activities including:

· Exchange rate exposure on borrowings denominated in foreign currencies;

· Interest rate 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 criteria for cash flow hedge accounting are met, the changes in value are taken to the income statement. If the risk that is being hedged does not impact the income statement in the same period, then an accounting mismatch arises from the hedging activities and there is a net charge or credit to the income statement.

Where derivatives are held to their full term mismatches will net out over the life of the instrument. The changes in value that are recorded during the lives of the derivatives, unless crystallised, do not represent cash flows. Therefore the group presents underlying earnings figures that exclude these non-cash items. In exceptional circumstances the group may terminate swap contracts before their maturity date. The payments or receipts arising from the cancellations are charged or credited against the liability or asset on the balance sheet, and amounts previously recognised in reserves are recycled through the income statement.

The group holds interest rate swaps with a notional principal of £518.1 million and cross currency swaps with a sterling principal of £98.3 million which economically act to hedge the interest rate risk on floating rate debt or the exchange rate risk on certain foreign currency borrowings. However, the swaps do not meet the hedge accounting rules of IAS 39 and therefore the changes in fair value are taken to gains/(losses) on financial instruments in the income statement. During the year there was a credit of £53.8 million (2014/15 charge of £183.4 million) in relation to these instruments.

An analysis of the amounts charged to the income statement in the period is presented in note 5 to the financial statements.

The group manages its electricity costs through a combination of self generation forward price contracts and financial derivatives. The group has fixed around 37% of the estimated wholesale energy usage for 2016/17.

Taxation

The total tax credit for the year was £9.7 million (2014/15: charge of £32.7 million).

The current tax charge for 2015/16 was £55.2 million (2014/15: £37.8 million). The deferred tax charge before exceptional tax was £13.7 million (2014/15: credit of £5.1 million).

There was an exceptional deferred tax credit of £78.6 million arising from the change in tax rates (2014/15 £nil). This was a result of the Finance Act 2015 being enacted in the current year, reducing the corporation tax rate from 20% to 18% with effect from 1 April 2020.

See note 6 for further detail.

The underlying effective rate of current tax on continuing operations, excluding prior year credits, exceptional tax credits and tax on exceptional items and financial instruments, calculated on profit from continuing operations before tax, exceptional items before tax and gains/(losses) on financial instruments was 18.5% (2014/15:17.6%).

Reported group profit for the period and earnings per share

After a loss of £0.7 million (2014/15: profit of £4.7 million) from discontinued operations, reported group profit for the period was £331.3 million (2014/15: £120.2 million). Profit before interest and tax was broadly flat year on year. Net finance costs were £30.7 million lower. Amounts charged to the income statement relating to financial instruments improved by £141.2 million. Tax charged excluding exceptional tax was £36.2 million higher before an exceptional deferred tax credit of £78.6 million arising from the change in corporation tax rate to 18%.

Underlying basic earnings per share (from continuing operations, before exceptional items, gains/(losses) on financial instruments, current tax on gains/(losses) on exceptional items and financial instruments and deferred tax) was 108.7 pence (2014/15: 107.2 pence) (see note 9). Lower financing costs largely offset the lower underlying PBIT and higher current tax charge.

Basic earnings per share were 139.8 pence (2014/15: 49.9 pence).

Group cash flow

Net debt at 31 March 2016 was £4,823.4 million (2014/15: £4,752.6 million). Balance sheet gearing (net debt/net debt plus equity) at the year end was 82.6% (2014/15: 86.1%). Net debt, expressed as a percentage of RCV at 31 March 2016 of £7,829 million was 61.6% (2014/15: 61.4%).

The fair value of net debt at 31 March 2016 is estimated to be £5,686.4 million (2014/15: £5,645.4 million) compared to the book value of £4,823.4 million (2014/15: £4,752.6 million). The difference between the book value and fair value of debt arises from fixed rate and index linked debt where the interest rate on the debt is higher than prevailing market rates at the year end.

Treasury management and liquidity

The group's principal treasury management objectives are:

· to access a broad range of sources of finance to obtain both the quantum required and lowest cost compatible with the need for continued availability;

· to manage exposure to movements in interest rates to provide an appropriate degree of certainty as to its cost of funds;

· to minimise counterparty credit exposure risk;

· to provide the group with an appropriate degree of certainty as to its foreign exchange exposure;

· to maintain an investment grade credit rating; and

· to maintain a flexible and sustainable balance sheet structure.

The group continues to ensure it has adequate liquidity to support business requirements and provide headroom for downside risk. At 31 March 2016 the group had £55.2 million (2014/15: £176.7 million) in cash and cash equivalents and committed undrawn facilities amounting to £875 million (2014/15: £745 million).

The group is funded for its projected investment and cash flow needs up to at least January 2018.

Cash is invested in deposits with financial institutions benefiting from high credit ratings and the list of counterparties is reviewed regularly.

In November 2015 Severn Trent Water completed its first US Private Placement debt issue raising the equivalent of £471 million at competitive pricing with maturities ranging from 11 to 15 years. The proceeds were received in March 2016 and were used to repay the remaining £396 million of our €700 million bond.

The group's policy for the management of interest rate risk requires that not less than 40% of the group's borrowings in AMP6 should be at fixed interest rates, or hedged through the use of interest rate swaps or forward rate agreements. Going forward, the group intends to manage its existing debt portfolio and future debt issuance to increase the proportion of debt which is at floating rates. At 31 March 2016, interest rates for 56% (2014/15: 67%) of the group's net debt of £4,823.4 million were fixed.

The group's long term credit ratings are:

The outlook is stable for Standard and Poor's, negative for Moody's

Pensions

The group operates two defined benefit pension schemes for its UK employees, of which the UK Severn Trent Pension Scheme (STPS) is by far the largest. The most recent formal triennial actuarial valuations and funding agreements were carried out as at 31 March 2013 for both schemes. As a result, deficit reduction contributions of £40 million in 2013/14, £35 million in 2014/15, £15 million in 2015/16 and £12 million per annum in subsequent years to 2024/25 were agreed. Further payments of £8 million per annum through an asset backed funding arrangement will also continue to 31 March 2032. The next triennial valuation, as at 31 March 2016, is underway.

As previously announced, the defined benefit schemes closed to future accrual on 31 March 2015. On 1 April 2015, members of the defined benefit schemes were transferred to the defined contribution Severn Trent Group Personal Pension Scheme, which was opened on 1 April 2012.

The key actuarial assumptions for the defined benefit schemes have been updated for these accounts. On an IAS 19 basis, the estimated net position of the schemes was a deficit of £309.5 million as at 31 March 2016. This compares to a deficit of £468.9 million as at 31 March 2015. The movements in the net deficit can be summarised as follows:

The funding level has increased to 87.1% (2014/15: 81.7%).

Exchange rates

The trading results of overseas subsidiaries are translated to sterling at the average rate of exchange ruling during the period and their net assets are translated at the closing rate on the balance sheet date. The impact of changing exchange rates on net assets was immaterial. Details of the impact of changing exchange rates on turnover and underlying PBIT are set out in the commentary on Business Services above.

Dividend

In line with its announced AMP6 policy the board has proposed a final ordinary dividend of 48.40 pence (2015: 50.94 pence). This gives a total ordinary dividend for the year of 80.66 pence (2015: 84.90 pence). The final ordinary dividend is payable on 22 July 2016 to shareholders on the register at 17 June 2016.

Principal risks and uncertainties

The board considers the principal risks and uncertainties affecting the business activities of the group to be those detailed below:

Customer perception

· Failure to improve and maintain our levels of customer service sufficiently to deliver what our customers tell us they want.

· Failure to take full advantage of the opportunities presented by the opening up of the non-household retail market to competition.

Legal & Regulatory environment

· Failure to effectively anticipate and/or influence future developments in the UK water industry resulting in our business plans becoming unsustainable.

· The regulatory landscape is complex and subject to on-going 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.

Operations, assets & people

· Loss of data or interruptions to our key business systems as a result of cyber threats.

· Failure to achieve our regulatory targets including targets from Ofwat in relation to operational performance of our assets resulting in regulatory penalties.

· Failure of certain key assets or processes may result in inability to provide a continuous supply of clean water and safely take waste water away within our area.

· Our operations 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.

· Inability to deal with the impact of extreme and unpredictable weather events on our assets and infrastructure and/or inability to successfully plan for future water resource supply and demand due to climate change.

Financial risks

· Lower interest rates, higher inflation or underperforming equity markets may require us to provide more funding for our pension schemes.

· Inability to fund the business sufficiently in order to meet our liabilities as they fall due.

Technical Guidance 2016/17

Regulated Water and Waste Water:

Revenues are expected to be in the range of £1.50 billion to £1.54 billion (2015/16: £1.51 billion).

We expect operating costs (IFRS) to be lower year-on-year (2015/16: £581 million) as we recognise the benefits of efficiency drive. In addition, we expect a further £130 million to £155 million of net infrastructure renewals expenditure (2015/16: £126 million), which will be charged to the income statement.

We expect to earn net rewards for 2016/17 ODI outperformance of £151 million (2015/16: £23.2 million). Wholesale Totex2 is expected to be £1.11 billion to £1.13 billion (2015/16: £1.02 billion), of which 42.1% will be capitalised onto the RCV.

Business Services

We expect to deliver growth in revenues and PBIT year-on-year (2015/16 £277 million and £27 million respectively, after adjusting for the impact of transferring non household retail to Water Plus).

Group

The group interest charge is now expected to be lower year-on-year (2015/16: £209 million), benefiting from refinancing at the end of 2015/16 and the impact of lower interest rates on floating rate debt.

The effective current tax rate for the group for 2016/17 is expected to be between 17% and 19% (2015/16: 18.5%.)

We estimate net capital expenditure (cash) under IFRS will be £450 million to £490 million (2015/16: £410 million).

In line with our announced policy, the dividend for 2016/17 will be 81.5p (2015/16: 80.66p) and will grow by at least RPI annually over AMP6.

Our RCV in March 2020 is now expected to be £9.3 billion3, impacted by lower RPI assumptions and savings on our totex programme.

1. ODIs quoted real at FY2012/13 prices

2. Excludes retail costs, includes regulated renewables

3. Assumes average of 2.5% year end RPI for 2016-2020, based on Office of Budget Responsibility forecasts and includes £670m of announced forecast efficiencies

Further information

For further information, including the group's preliminary results presentation, see the Severn Trent website (www.severntrent.com).

Consolidated income statement

Year ended 31 March 2016

Consolidated statement of comprehensive income

Year ended 31 March 2016

Consolidated statement of changes in equity

Year ended 31 March 2016

Consolidated balance sheet

At 31 March 2016

Consolidated cash flow statement

Year ended 31 March 2016

Cash and cash equivalents at the beginning of the period includes £19.3 million which was classified as assets held for sale (see note 8).

Notes

1 Basis of preparation

a) Basis of preparation

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), International Accounting Standards (IAS) and IFRIC interpretations issued and effective and ratified by the European Union as at 31 March 2016 and those parts of the Companies Act 2006 applicable to companies reporting under IFRS as adopted by the European Union.

The financial statements have been prepared on the going concern basis under the historical cost convention as modified by the revaluation of certain financial assets and liabilities (including derivative instruments) at fair value.

The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses for the reporting period. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results may ultimately differ from those estimates.

The financial information set out in this announcement does not constitute the company's statutory accounts, within the meaning of section 430 of the Companies Act 2006, for the years ended 31 March 2016 or 2015, but is derived from those accounts. While the financial information included within this announcement has been prepared in accordance with the recognition and measurement criteria of IFRS, it does not comply with the disclosure requirements of IFRS. Statutory accounts for 2015 have been delivered to the Registrar of Companies and those for 2016 will be delivered following the company's annual general meeting. The auditors have reported on those accounts; their reports were unqualified and did not contain statements under section 498(2) or (3) of the Companies Act 2006.

The auditors have consented to the publication of the Preliminary Announcement as required by Listing Rule 9.7a having completed their procedures under APB bulletin 2008/2.

b) Prior year restatement

The comparative balance sheet has been restated to reflect a reclassification between property plant and equipment and non-current trade and other payables. Contributions which had been received in previous years in relation to infrastructure assets, and which had a carrying value of £294.5 million as at 31 March 2014 were identified as being deducted from the carrying value of property, plant and equipment. In order to comply with the requirements of IAS 16 and IAS 18, these contributions have been reclassified from property, plant and equipment to non-current trade and other payables.

Whilst finalising the proposed adjustments, it was noted that amortisation was not charged on these contributions before 2004 when the accounting treatment was clarified and therefore an additional £13.5m of amortisation has been credited to opening retained earnings.

In addition, the restated balances result in an increased total tax liability of £67.8 million (£1.9 million current tax and £65.9 million deferred tax) as the carrying value of the underlying infrastructure assets previously shown net reduced the deferred tax liability previously calculated and there were other non-material adjustments to deferred tax arising from leases and financial instruments. The total tax restatement of £67.8 million was charged to opening retained earnings.

Property, plant and equipment and other intangible fixed assets have been analysed to disclose separately the carrying value of assets under construction. This resulted in a further adjustment between property, plant and equipment and other intangible fixed assets of £2.6 million.

The adjustment to the opening balances at 1 April 2014 is:

2 Segmental analysis

The group is organised into two main business segments:

Regulated Water and Waste Water includes the wholesale water and waste water activities of the group's regulated subsidiary Severn Trent Water Limited and its retail services to domestic customers.

Business Services includes the group's Operating Services businesses in the US and the UK, Severn Trent Water Limited's non-household retail activities and the group's renewable energy business.

In the prior year results all of Severn Trent Water Limited's activities comprised a single segment and Severn Trent Services comprised the group's Operating Services and Water Purification businesses. Comparative information for the new segmentation is not available and the cost to develop it would be excessive. Therefore the current year results have been presented on both the old basis and new basis of segmentation in accordance with IFRS 8.

The Water Purification business was classified as a discontinued operation in the year ended 31 March 2015 and the sale of this business was completed on 2 July 2015. The prior year segmental results have been restated to present the Water Purification business as a discontinued operation.

a) Segmental results

The tables below shows the changes from the old to the new segmentation for turnover and PBIT for the year ended 31 March 2016:

2 Segmental analysis (continued)

1. The electricity generating assets owned by Severn Trent's regulated and non-regulated businesses are now managed by the Business Services segment. Business Services external sales includes £8 million of income that was treated as a reduction in operating costs in Severn Trent Water

2. Management of Severn Trent Water's non-household retail activities has been transferred to the Business Services segment

3. The additional inter-segment sales in Regulated Water and Waste Water represent the wholesale water and waste water charges to non-household retail within Business Services

4. The additional inter-segment sales in Business Services represent sales from the Regulated Renewable Energy business to Regulated Water and Waste Water

The following table shows the segmental turnover and PBIT on the old segmentation:

Segmental underlying PBIT is reconciled to the group's profit before tax as follows:

2 Segmental analysis (continued)

b) Segmental capital employed

The tables below show the changes from the old to the new segmentation for capital employed as at 31 March 2016:

The following table shows the segmental capital employed on the old segmentation: