£1.68bn Accounting Maneuver Inflates Water Utility’s Financial Records

BBC Panorama has uncovered that a leading English water utility is employing an accounting method to artificially boost its financial statements by over a billion pounds. Severn Trent Water asserts that a specific investment is valued at £1.68bn within its financial records, despite it holding no actual worth for the company as a whole. This fabricated sum contributes to presenting the company as more financially sound and aids in justifying substantial shareholder dividends. Severn Trent refutes claims that its accounts are deceptive, stating that Panorama’s assertions are “completely inaccurate”. The water utility, overseen by Ofwat, operates within an intricate network of entities forming the broader Severn Trent plc group. It provides services to over eight million individuals throughout central England and mid-Wales, and has achieved the Environment Agency’s highest four-star rating for environmental performance for an unprecedented five years in a row. Its ultimate parent entity, Severn Trent plc, is favored by investors due to its consistent distribution of significant dividends to shareholders. Nevertheless, a segment of Severn Trent’s customer base expresses dissatisfaction. The Shrewsbury-based advocacy organization, Up Sewage Creek, advocates for a greater portion of the company’s profits to be allocated towards addressing pollution in nearby rivers. A campaigner remarked, “They’ve not updated the infrastructure, they’ve used our money to enrich themselves and enrich their shareholders.” This intricate accounting maneuver commenced in March 2017 with the establishment of Severn Trent Trimpley, a shell company devoid of funds or assets, as part of the group. Severn Trent Draycote, another company within the group that owns the water utility, subsequently agreed to acquire Trimpley for £2. Trimpley then proceeded to issue further shares, which Draycote purchased for an astonishing £3bn. However, no actual cash was exchanged, as Draycote compensated Trimpley with a £3bn loan note, essentially an IOU. Consequently, on paper, Trimpley instantly appeared to possess a value of £3bn by virtue of holding this IOU. Severn Trent Water subsequently obtained a 49% stake in Trimpley, an investment that was recorded in the water company’s accounts with a valuation of £1.47bn. This suggests the creation of a highly valuable asset for Severn Trent Water seemingly from nothing. The Trimpley investment came to Panorama’s attention through the efforts of retired auditor Stanley Root. He informed the program: “This is as near to an unreal transaction as you can get – that has just been made up and put into the accounts to make the accounts look better.” He further stated, “I think it misleads the reader to think 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 really is. So I think the balance sheet, the financial statements, are misleading.” Since 2017, the fictitious sum recorded in Severn Trent Water’s financial records has appreciated in value due to interest accruals. Draycote committed to paying Trimpley interest on the £3bn IOU, leading to an annual increase in the IOU’s size. As the IOU’s value escalates, so does Trimpley’s notional worth, which in turn causes Severn Trent Water’s investment in Trimpley to grow each year. The Trimpley investment is currently assessed at £1.68bn in the regulated water company’s 2023/24 financial statements. These accounts underwent auditing and received approval from Severn Trent Water’s directors. Regarding the Trimpley investment, the accounts state: “In the opinion of the directors the fair value of the company’s investments are not less than the amount at which they are stated in the balance sheet.” Although this assertion might be technically accurate, the £1.68bn valuation relies on an IOU that is ultimately guaranteed by Severn Trent Water itself. Within the consolidated group accounts, the fictitious funds are offset by the IOU issued by Draycote, meaning only the balance sheet of the regulated water company, Severn Trent Water, shows an inflated figure. The rationale behind this action remains a question. Severn Trent informed the BBC that Trimpley was established to enable the water company to properly account for prospective earnings, but it has never been utilized for this stated objective. An alternative potential reason is that Trimpley contributes to facilitating higher dividends. In addition to strengthening the balance sheet, the fabricated £1.68bn has also been incorporated into Severn Trent Water’s retained earnings—the fund from which payments can be distributed to shareholders. A larger sum within this fund makes it simpler to rationalize substantial dividend distributions. Since Trimpley’s inclusion in the accounts in 2017, Severn Trent Water Ltd has disbursed £1.615bn in dividends. Profits during this identical timeframe amounted to £1.246bn, indicating that Severn Trent Water distributed £369m more than its generated profit over that period. This suggests a depletion of cash from the regulated water company. Auditor Stanley Root asserts that water companies face considerable pressure to issue significant dividends, and the Trimpley arrangement assists Severn Trent Water in achieving this. He stated, “It makes the company’s balance sheet look more stable than it really is. It gives them the appearance of financial resilience. It helps to support the dividend payments they’re making.” Severn Trent disputes the notion that Trimpley has facilitated shareholder distributions, stating: “All dividends paid by Severn Trent are justified by earnings and any assertion otherwise is unjustified and wrong.” Nevertheless, it is evident that Trimpley significantly influences the pool of funds available for shareholder remuneration. Severn Trent Water’s 2023/24 accounts, which incorporate the £1.68bn investment, indicate the company possesses robust retained earnings of £1.84bn. In contrast, the financial statements for the broader Severn Trent Group, where all inventive accounting practices are neutralized, report retained earnings of merely £7.9m. Severn Trent maintains: “Trimpley is an entirely legitimate, legal and transparent structure.” It asserts that its accounts are independently audited and that “any suggestion that we have misled our investors, regulators and customers on the company’s finances is false”. The company also states that the IOU is “very much a real asset” because it is supported by other entities within the group. Furthermore, Severn Trent claims to be in sound financial health, having secured an additional billion pounds from shareholders last year, and pledges to persist in investing unprecedented sums into infrastructure.