£1.68 billion accounts overstated water company’s books

BBC Panorama has discovered that one of England’s top-rated water companies is using accounting tricks to artificially inflate its balance sheet by more than a billion pounds.

Severn Trent Water claims the investment in its books is worth £1.68 billion, when in reality it has no value to the overall business.

The retained money makes the company financially stronger and helps support its bumper payouts to shareholders.

Severn Trent has denied these accounts are misleading and said that Panorama’s allegations are “completely false”.

The water company – which is regulated by Ofwat – is part of a complex web of companies in the wider Severn Trent PLC group.

It serves more than eight million people in central England and mid-Wales and has been awarded the Environment Agency’s top four-star rating for environmental performance for five consecutive years. Its original parent company, Severn Trent PLC, is popular with investors because it has consistently paid large dividends to shareholders.

But some Severn Trent customers are unhappy. Shrewsbury-based campaign group Up Sewage Creek wants more of the company’s earnings to be used to tackle pollution in local rivers. “They have not updated the infrastructure, they have used our money to enrich themselves and enrich their shareholders,” one of the campaigners told us.

The complex accounting tricks began in March 2017 when a shell company called Severn Trent Trimley was set up as part of the group, with no money or assets behind it. Another Severn Trent company, called Severn Trent Draycott – which owned the water company – agreed to buy Trimley for £2.

Trimpley then issued additional shares and Dracote bought them for an astonishing £3 billion.

However, no money actually changed hands, as Dracote paid Trimley with a £3bn loan note – effectively an IOU. But, on paper, Trimpley immediately appeared to be worth £3bn because he had the IOU.

Severn Trent Water then acquired 49% of Trimley – and that investment was valued at £1.47 billion in the water company’s books. An extremely valuable asset for Severn Trent Water appears to have been created out of thin air.

Panorama discovered the Trimble investments through the work of retired auditor Stanley Root.

He said on the programme: “This is as close as you can get to an unreal transaction – it has just been made up and put into the accounts to make the accounts look better.

“I think this misleads the reader to think that the net worth of Severn Trent Water Limited is higher than they are and that the company is in a much healthier position than it actually is. So I think that the balance sheet, financial statements , confusing.”

Since 2017, the value of money held on Severn Trent Water’s books has increased due to interest payments.

Dracote has agreed to pay Trimley interest on the £3 billion IOU, meaning the IOU is getting bigger every year.

As the value of the IOU increases, so does the paper value of Trimble. And that means Severn Trent Water’s investment in Trimley is also growing every year.

The Trimble investment is now valued at £1.68bn in the regulated water company’s 2023/24 accounts.

Those accounts were audited and signed by the directors of Severn Trent Water. When referring to Trimble investments, the accounts say: “In the opinion of the directors the fair value of the Company’s investments is not less than the amount at which they are stated in the balance sheet.”

Although this may be technically correct, the £1.68 billion value is based on an IOU ultimately backed by Severn Trent Water.

The funds created in the wider group accounts are offset by IOUs issued by Draycott, so it is only the balance sheet of the regulated water company, Severn Trent Water, that is inflated.

So why do it? Severn Trent told the BBC that Trimley was set up to allow the water company to legitimately account for future earnings, but it was never used for that purpose.

Another possible explanation is that Trimble helps support the increased dividend.

As well as strengthening the balance sheet, £1.68bn has also been added to Severn Trent Water’s retained earnings – a reserve of money from which cash payments can be made to shareholders. The more money there is in that pot, the easier it will be to justify a bigger dividend.

Since Trimpley was added to the accounts in 2017, Severn Trent Water Ltd has paid out £1.615 billion in dividends.

Profit in the same period was £1.246 billion, so Severn Trent Water paid out £369 million more than it earned during that period. It appears the regulated water company is being drained of cash.

Auditor Stanley Root says water companies are under immense pressure to pay adequate dividends and the Trimley scheme helps Severn Trent Water.

“It makes the company’s balance sheet appear more stable than it actually is. It gives them the appearance of financial flexibility. It helps support the dividend payments they’re making.”

Severn Trent denies that Trimley has supported shareholder payments: “All dividends paid by Severn Trent are justified on an earnings basis and any claim otherwise is unfair and false.”

However, it is clear that Trimble is having a dramatic impact on the amount of money that can be paid out to shareholders.

Severn Trent Water’s 2023/24 accounts – which include an investment of £1.68 billion – report that the company has retained very healthy earnings of £1.84 billion.

But the accounts of the wider Severn Trent Group, where all creative accounting has been cancelled, show retained earnings of only £7.9m.

Severn Trent says: “Trimply is a completely legitimate, legal and transparent structure.”

Its accounts are independently audited and “any suggestion that we have misled our investors, regulators and customers on the company’s finances is false”.

It said the IOU is “to a large extent a real asset” as it is backed by other companies in the group.

Severn Trent also says its financial position is good, it raised an extra billion pounds from shareholders last year and will continue to invest record amounts in infrastructure.