Annual Report and Accounts 2010

In the final year of AMP4 we continued to improve our financial and operational performance, and make our corporate responsibilities part and parcel of the way we operate and plan for the future. At the same time we prepared for AMP5 with lead-in capital investments, putting us in a strong position to meet the challenges of the new regulatory period and beyond.

Focus on highest standards

In 2009/10 and throughout AMP4 we continued to improve our standards in water, waste water and customer services while minimising our carbon footprint.

KSI: Providing a continuous supply of quality water

In 2009 we delivered 99.97% overall compliance with DWI water quality regulatory standards, maintaining one of the best records in the industry. We completed our programme of pressure logger deployment and implemented improvements to our network to reduce the numbers of customers experiencing low pressure from 1,546 to 424 and achieve our KPIs.

During the year we have made significant organisational changes. We designed and introduced a 24/7 shift system, giving us distribution teams available at all times to meet customer needs. We have also made major structural changes in our Asset Creation team to create the ‘expert client’ capability we need as part of our “one supply chain” strategy for AMP5. These changes have been built upon and continue the Safer Better Faster (SBF) process improvement programme way of working.

The severe winter’s snow and ice prevented us reaching parts of our network, caused issues on production works and resulted in a 12% increase in the number of burst pipes. Thanks to our teams’ rapid response we were still able to achieve Ofwat’s leakage target for the third successive year. However, there was an increase in the number of unplanned supply interruptions and this will remain an area of focus for us in 2010/11.

From AMP4 to AMP5

We have completed a major programme of capital works at our biggest treatment works in Frankley, Birmingham, investing £54 million to enable us to treat 120Ml/d of water pumped from the River Severn at Trimpley works. This additional supply resilience and capacity contributed to our improved Security of Supply Index (SOSI), moving to 99, and fulfilling our section 19 undertaking with Ofwat. Additionally we have installed a new works control system and have decommissioned the bulk chlorine gas system used for disinfection and replaced it with a system using on site generation. Having removed this safety risk for local residents and employees we will continue our programme of bulk chlorine removal in AMP5.

Building on lessons learned following the 2007 floods, we have included in our business plan £165 million of investment to improve the resilience of our supply system. We have commenced our planning for AMP5 early and have made a good start to creating the “one supply chain” with our contract partners taking accountability for the detailed design of our schemes as well as their construction.

AMP4 Highlights included:

• completing the Frankley scheme and reducing leakage to achieve a SOSI of 99 and fulfil the section 19 undertaking;
• renewing 1,289 km of mains; and
• reinforcing of the network in Derbyshire, Nottinghamshire, Powys and Shropshire to improve water supplies during periods of peak demand.

In AMP5 we will improve our asset investment processes using the improved operational and plant performance information, available due to our investments in information technology. We will improve the resilience and performance of our assets through better maintenance and operation. We will also continue to increase our standards and reduce our costs through process improvement and SBF.

KSI: Dealing effectively with waste water

In 2009/10 we reduced the number of pollution incidents for the third consecutive year, this time by 12.5%. We successfully installed more remote monitoring on our sewerage network and rolled out SBF to around 1,020 staff, saving over £2 million in operating costs whilst responding faster to customers’ needs. We were also more effective when we responded, with an average of 90% of all jobs resolved first time, an improvement of 20% over two years.

Due to a small rise in the number of failures at our works, particularly during the first seven months of 2009, our sewage treatment breach of consents KPI deteriorated to lower quartile. We are dissatisfied with this position but as a result of detailed investigations, we do understand in each case why this has happened. We have put in place a detailed performance improvement plan which will ensure the correct level of focus and activity whilst we get performance back on track.

From AMP4 to AMP5

Overall, we ended AMP4 with stable serviceability and continued improvements to our network. The work we undertook through the period is now bearing fruit, with 15% fewer customer complaints and 12.5% fewer pollution incidents.

AMP4 Highlights included:

• improving river quality through a 95% reduction in the number of unsatisfactory intermittent sewerage discharges;
• sustaining high levels of effluent and sludge quality through a £450 million maintenance programme; and
• generating 176 gigawatt hours of renewable energy from sewerage and waste water, saving the equivalent of 95,776 tonnes of carbon.

In AMP5 we will continue to build on the successes we have had in serviceability, customer services and the performance of our people and our assets. A significant change for us and our customers in AMP5 will be the transfer of individual customers’ private sewers into water company ownership. This is designed to reduce the risk of future liability and repair costs to the benefit of customers and help promote the integrated management of the sewerage network. The transfer is currently forecast to happen in October 2011. This will see approximately 37,000 km of existing private sewers transfer into our ownership, along with responsibility for repair and maintenance. We also expect that up to 4,000 private pumping stations will transfer on a phased basis over 5 –10 years following the sewer transfer. We await the consultation on the regulations which will confirm the scope and timing of transfer. In the meantime, we have continued to engage with regulators and government to put in place the necessary regulatory and business response with the aim of delivering an efficient service to customers following transfer.

A key challenge we face is the need to strike a good balance between improving river ecology and carbon production. Large scale capital projects are not always the best answer. We need to become more innovative, finding ways of improving river quality while keeping down carbon emissions and costs. One example is catchment management where we are working with farmers and industrialists, providing incentives for them to discharge less effluent or toxic waste at their sites into water courses. We have also joined forces with the Environment Agency to explore options around the way sewage treatment discharge consents are set and enforced.

KSI: Responding to customers’ needs

2009/10 was a year of continuous improvement, where we have built on initiatives already in place through staff training and capabilities. For the third year running we reduced written customer complaints per 1,000 properties by 23% and our first time call resolution for billing improved slightly to 89%. We also maintained our first time job resolution performance at 96.5%. Our goal of 34.3 debtor days was harder to achieve because unemployment and insolvencies were higher than anticipated. We achieved 32.6 days which, after allowing for increased levels of bad debt write off, was aligned to last year’s performance. This helped to mitigate the impact on income through a difficult period.

Following the launch of our online account management service over 100,000 customers have already registered. They will now have direct control over their accounts, being able to update personal details including changing address, choosing their payment methods and the option to receive their bill electronically.

The recession meant more vulnerable people needed help to pay their bills. We invested £5.5 million in the Severn Trent Trust Fund in 2009/10, set up to support customers in genuine need of financial assistance, and helped over 4,000 customers through our WaterSure tariff. More people signed up to Water Direct, a third party deduction scheme from the Department for Work and Pensions, and opted to pay their bills through a payment plan or direct debit. We also set up a relationship team to work with landlords such as councils and housing associations. This will help us tackle bad debt by encouraging landlords to provide us with information that can help track tenants moving in and out of properties, in particular those who move often.

From AMP4 to AMP5

We improved performance against many of our customer service KPIs in AMP4, moving them from lower quartile to upper quartile a year ahead of schedule in 2010.

One of our challenges in AMP5 will be maintaining high standards while changing the way we measure our performance. In AMP4 we measured our progress against one set of performance indicators; in AMP5 we will shift to Ofwat’s recently set service incentive measurements. For instance, as well as measuring how quickly we answer a call we will also evaluate how happy the customer is with the interaction.

Benchmark tests show we are strong on process compliance and have highly trained contact centre staff – we will continue to focus our efforts in improving further the service we provide to all our customers through continued upskilling of our teams. With a strong operating platform in place and opportunities to outsource routine back office processes, we will achieve these service improvements with minimal investment and without disruption to our service.

For AMP5 we elected to retain optional metering. Our research showed customers preferred to have a choice and at this point we do not feel compulsory metering is necessary. New homes, however, will continue to be metered.

KSI: Minimising our carbon footprint

We are always on the lookout for ways to reduce our energy usage, with targets set for every aspect of our business. Overall company electricity usage was 897 gigawatt hours, a reduction of 19 gigawatt hours when compared to 2008/09.

In 2009/10 we focused on reducing energy usage at our small sites by initiating a read programme for all meters where bills were previously calculated on estimated readings.

The production of renewable energy reached a record level of 183 gigawatt hours, a 12% increase on the previous year and around 20% of our total consumption. This was despite the impact of the cold weather which reduced the production of biogas from our sewage treatment works.

From AMP4 to AMP5

We made good progress in developing other sources of renewable energy during this period and are now moving forward with the planning and development of wind turbines as well as energy from a new crop plant at Stoke Bardolph in Nottinghamshire.

AMP4 Highlights include:

• achieving the UK government goal of 20% renewable energy by 2020, 10 years ahead of schedule, in 2010;
• receiving the Carbon Trust Standard by showing a reduction in carbon emissions over the last three years and having a robust carbon management programme in place; and
• being on course to achieve our goal to produce 30% renewable energy by 2014/15. We keep a close eye on government incentives in this area, where the economic or technological viability of initiatives and processes are changing.

A safer workplace

In 2009/10 we improved our lost time incidents per 100,000 hours to 0.36, a reduction of 16% on the previous year. Our performance is now close to best in class. Our RIDDOR (Reporting of Injuries, Diseases and Dangerous Occurrences (Regulations)) rate was 0.31, falling short of our measure of 0.28.

As part of the business planning process we commissioned an independent safety risk expert to analyse the risk profile of our activities, allowing us to prioritise our improvement projects.

We won 18 awards, one of which was a company Gold award for our overall improvement programme. As well as winning RoSPA (Royal Society for the Prevention of Accidents) awards ourselves, we organised a joint ceremony with RoSPA for our award-winning contractors and suppliers. Twenty-two of our suppliers won RoSPA awards in 2009/10, eight of which were gold.

From AMP4 to AMP5

The most significant shift in engaging people to make a safer place to work came about through fresh approaches to safety. More employees are taking on the roles of Safety Representatives and Safety Coaches, working with managers to improve our culture and environment. The culture has improved to such an extent that, from 1 April 2010, health and safety will continue as the responsibility of specific business areas working on improvement plans with only a small central team to help with planning and coordination.

Focus on lowest charges

To ensure we meet our commitment to have the lowest possible charges we need to make the right investments in the right programmes to deliver the right customer and environmental standards as efficiently as possible.

KSI: Having the lowest possible charges

Despite continuing economic pressures during 2009/10 our financial and operational performance showed continued improvement across the board as we ended the fiscal year and closed out AMP4. Trading was in line with our expectations, as were operating costs and capital expenditure. The continuing rise in unemployment and a record number of insolvencies in the first half of the year meant the bad debt charge moved up slightly to 2.5% of turnover. While insolvency levels are returning to normal levels, we will continue to monitor developments closely.

From AMP4 to AMP5

The tough efficiency plans we set out in our Final Business Plan are reflected in Ofwat’s Final Determination. Considerable lead-in investments during the final year of AMP4, however, mean we are well prepared to meet the requirements of AMP5. The investments were focused in four areas:

1. Systems and technologies – Phase 1 of SAP went live in December 2009 in Human Resources, Finance and Procurement. Implemented on time and to cost, it has allowed us to make savings in our business service areas early in AMP5.
2. People and processes – We rolled out the Safer Better Faster process improvement programme to more of our teams. This helps us to make our processes leaner, improving our ability to get it right first time every time, upskilling our workforce to enable it to work in different ways and areas of the business, and giving our people a better understanding of how their work fits into our business as a whole.
3. Accommodation – As we reported last year our accommodation strategy is set and work is now well in hand to create the right property portfolio to support us for the future. The key project within our programme is the construction of Severn Trent Centre in Coventry. This building has been certified BREEAM (Building Research Establishment Environmental Assessment Method) excellent and its exceptionally low carbon output is matched by its exceptionally low water consumption. From autumn onwards 1,700 people will be moving into our new Centre.
4. Energy – Investment in our renewable energy programme provides a natural hedge against rising wholesale energy prices. We are in the process of growing the UK’s first commercial scale energy crop at Stoke Bardolph, Nottinghamshire, as well as planning wind turbines and further renewable energy generation from sewage sludge.

KSI: Maintaining investor confidence

This was a challenging price review, with the Draft Determination for the AMP5 period, published by Ofwat in July 2009, being significantly different to our Final Business Plan. This prompted investor concerns over our ability to deliver the required outputs within the capital and operational expenditure limits set, and to finance this investment. We made a number of representations to Ofwat over the autumn, as well as encouraging our shareholders and other stakeholders to express their own views.

This was a constructive process, and the Final Determination published in November 2009 more closely reflected our Final Business Plan, the one remaining area of difference being the weighted average cost of capital, which Ofwat set at 4.5% compared with 5% in our Final Business Plan. We have confidence in our ability to meet the challenges ahead.

From AMP4 to AMP5

We will continue to be open and proactive in our communications with shareholders and other stakeholders. We have updated our KPIs to ensure they continue to demonstrate our drive for higher standards in the future, and to reflect the evolution of the regulatory environment. We will continue to report on our progress each year.

KSI: Promoting an effective regulatory regime

Our regulatory performance is on track and we are in a strong position to tackle whatever challenges the future might hold.

From AMP4 to AMP 5

We believe we have done more than many other water companies to help shape the future of the regulatory framework and we are well placed to contribute to the debate with policymakers and Ofwat.

There is a growing consensus that the current policy and regulatory framework of the industry is not sustainable long term and we have made our own contribution to the debate with our “Changing Course” report, published in April 2010 and available on our website. We will continue to have discussions with shareholders and policymakers alike to help shape the future of our industry in the interests of our customers, the environment and our shareholders.

Focus on great people

To become the best water and waste water company in the UK we need to have the right people and provide them with the right technology and facilities, and a safe, modern environment in which to do their jobs both within the company and in our supply chain.

KSI: Having the right skills to deliver

The final year of AMP4 has been one of considerable change for our employees involving upskilling, an impending major office move, the introduction of new technology and a new pay system as we gear up for AMP5. We report that our employee surveys show our workforce remains positively engaged at 74% (2009: 83%), even though it was challenged by many changes.

We are committed to creating a diverse workforce which reflects the communities in which we operate. We believe that a diverse and inclusive culture is a key factor in being a successful business. We aim to have employees who are inspired and motivated and who are on a journey towards our vision of a diverse, engaged workforce. Our diversity strategy is aimed beyond basic compliance towards a more proactive approach. We do not badge diversity, but ensure that it is an integral part of how we work by integrating the concepts of treating everyone fairly and valuing differences in how we think, behave and operate. Our aim is to reflect the community we work in and serve and to ensure that we are an attractive employer. We measure our diversity performance against external benchmarks and our recruitment and training initiatives are resulting in a gradual increase in the diversity of our people.