BBC
One of England's highest-rated water companies is using an accounting trick to artificially inflate its balance sheet by more than £1 billion, BBC Panorama has discovered.
Severn Trent Water claims an investment is worth £1.68 billion in its accounts, when in reality it has no value to the whole business.
The money made up makes the company look financially stronger and helps support its bumper payouts to shareholders.
Severn Trent denies the accounts are misleading and says Panorama's claims are “completely inaccurate.”
The water company – which is regulated by Ofwat – is part of a complex network of companies within the wider Severn Trent plc group.
It serves more than eight million people across central England and mid Wales and has received the Environment Agency's top four-star rating for its environmental performance for a record five years consecutive. Its ultimate parent company, Severn Trent plc, is popular with investors because it has a history of paying large dividends to shareholders.
But some Severn Trent customers are unhappy. Shrewsbury-based campaign group Up Sewage Creek wants more of the company's revenue to be used to tackle pollution in local rivers. “They did not modernize the infrastructure, they used our money to enrich themselves and their shareholders,” one of the activists explained to us.
This complex accounting trick began in March 2017 when a shell company, with no money or assets, called Severn Trent Trimley, was created within the group. Another Severn Trent company, called Severn Trent Draycote, which owned the water company, agreed to buy Trimpley for £2.
Trimpley then issued additional shares and Draycote bought them for a staggering £3 billion.
However, no money actually changed hands, as Draycote paid Trimpley a £3 billion loan – in effect an IOU. But, on paper, Trimpley immediately appeared to be worth £3 billion because he held the IOU.
Severn Trent Water then acquired 49% of Trimley – and this investment was valued in the water company's accounts at £1.47 billion. A hugely valuable asset appears to have been created out of thin air for Severn Trent Water.
Panorama discovered the Trimley investment through the work of retired auditor Stanley Root.
He told the programme: “It's as close to an unreal transaction as you can get – one that has just been made up and written into the accounts to make the accounts look better.
“I think this misleads the reader into thinking that the net assets of Severn Trent Water Limited are higher than they are and that the company is in a much healthier position than it actually is. So I think the balance sheet, the financial statements, are misleading.”
Retired auditor Stanley Root examines the finances of the UK's 10 biggest water and sewerage companies.
Since 2017, the money built up on Severn Trent Water's books has increased in value due to interest payments.
Draycote agreed to pay Trimpley interest on the IOU of £3 billion each year, meaning the IOU increases each year.
As the value of the IOU increases, so does Trimley's paper value. And that means Severn Trent Water’s investment in Trimley is also growing every year.
Trimley's investment is now valued at £1.68 billion in the regulated water company's 2023/24 accounts.
These accounts have been audited and signed by the directors of Severn Trent Water. In relation to Trimpley's investment, the accounts state: “In the opinion of the directors, the fair value of the company's investments is not less than the amount for which they are shown in the balance sheet.”
While this may be technically correct, the £1.68 billion value is based on an IOU which is ultimately backed by Severn Trent Water itself.
In the wider group's accounts, the replenished money is canceled by the IOU issued by Draycote, so only the balance sheet of the regulated water company, Severn Trent Water, is inflated.
Campaigners in Shrewsbury want more of the company's profits to be used to tackle pollution in local rivers.
So why do it? Severn Trent told the BBC that Trimley was created to allow the water company to legitimately account for its future profits, but was never used for that purpose.
Another possible explanation is that Trimley is helping to support the dividend increase.
As well as strengthening the balance sheet, the £1.68 billion has also been added to Severn Trent Water's retained profits, which is the cash reserve from which cash can be paid to the shareholders. The more money in that kitty, the easier it is to justify big dividends.
Since Trimley was added to the books in 2017, Severn Trent Water Ltd has paid £1.615 billion in dividends.
Profits over the same period were £1.246 billion, meaning Severn Trent Water paid out £369 million more than it made during that period. It appears that money from the regulated water company is being drained.
Auditor Stanley Root says water companies are under heavy pressure to pay substantial dividends and the Trimley scheme helps Severn Trent Water deliver on its promises.
“It makes the company's balance sheet appear more stable than it actually is. It gives them an appearance of financial resilience. It helps support the dividend payments they pay.”
Severn Trent denies that Trimpley supported the shareholder payments: “All dividends paid by Severn Trent are justified by profits and any claims to the contrary are unjustified and false.”
However, it is clear that Trimpley has a considerable effect on the amount of money from which shareholders can be paid.
Severn Trent Water's 2023/24 accounts – which include the £1.68 billion investment – show the company has very healthy retained profits of £1.84 billion.
But the accounts for the wider Severn Trent Group, where all creative accounting is written off, show retained profits of just £7.9 million.
Severn Trent said: “Trimpley is a completely legitimate, legal and transparent organization. »
Its accounts are independently audited and “any suggestion that we have misled our investors, regulators and customers about the company’s finances is false”.
He says the IOU is “a real asset” because it is supported by other companies in the group.
Severn Trent also says it is in good financial health, having raised a further £1 billion from shareholders last year and will continue to invest record sums in infrastructure.
