Major water company uses accounting trick to inflate balance sheet by £1.68bn

One of England's top-rated h2o companies is utilizing an accounting instrumentality to artificially inflate its equilibrium expanse by much than a cardinal pounds, BBC Panorama has discovered.

Severn Trent Water claims that an concern is worthy £1.68bn successful its accounts, erstwhile successful world it has nary worth to the wide business.

The made-up wealth makes the institution look much financially robust and helps to enactment its bumper payouts to shareholders.

Severn Trent denies the accounts are misleading and says Panorama's allegations are "completely inaccurate".

The h2o institution - which is regulated by Ofwat - is portion of a analyzable web of companies successful the wider Severn Trent plc group.

It serves much than 8 cardinal radical crossed cardinal England and mid-Wales and has been awarded the Environment Agency's apical four-star standing for biology show for a grounds 5 consecutive years. Its eventual genitor company, Severn Trent plc, is fashionable with investors, arsenic it has consistently paid ample dividends to shareholders.

But immoderate of Severn Trent's customers are unhappy. The Shrewsbury-based run radical Up Sewage Creek wants much of the company's net to beryllium utilized to combat contamination successful section rivers. "They've not updated the infrastructure, they've utilized our wealth to enrich themselves and enrich their shareholders," 1 of the campaigners told us.

The analyzable accounting instrumentality started successful March 2017 erstwhile a ammunition company, with nary wealth oregon assets, called Severn Trent Trimpley was acceptable up arsenic portion of the group. Another Severn Trent institution called Severn Trent Draycote - which owns the h2o institution - agreed to bargain Trimpley for £2.

Trimpley past issued further shares and Draycote bought them for a staggering £3bn.

No wealth really changed hands, however, arsenic Draycote paid Trimpley with a £3bn indebtedness enactment - efficaciously an IOU. But, connected paper, Trimpley instantly appeared to beryllium worthy £3bn due to the fact that it had the IOU.

Severn Trent Water past acquired 49% of Trimpley - and that concern was valued successful the h2o company's accounts astatine £1.47bn. A hugely invaluable plus appears to person been created for Severn Trent Water retired of bladed air.

Panorama discovered the Trimpley concern done the enactment of retired auditor Stanley Root.

He told the programme: "This is arsenic adjacent to an unreal transaction arsenic you tin get - that has conscionable been made up and enactment into the accounts to marque the accounts look better.

"I deliberation it misleads the scholar to deliberation that the nett assets of Severn Trent Water Limited are higher than they are and that the institution is successful a overmuch healthier presumption than it truly is. So I deliberation the equilibrium sheet, the fiscal statements, are misleading."

Since 2017, the made-up wealth connected Severn Trent Water's books has grown successful worth due to the fact that of involvement payments.

Draycote has agreed to wage Trimpley involvement connected the £3bn IOU each year, which means the IOU gets bigger each year.

As the worth of the IOU goes up, truthful does the insubstantial worth of Trimpley. And that means Severn Trent Water's concern successful Trimpley rises each twelvemonth too.

The Trimpley concern is present valued astatine £1.68bn successful the regulated h2o company's 2023/24 accounts.

Those accounts were audited and signed disconnected by Severn Trent Water's directors. When referring to the Trimpley investment, the accounts say: "In the sentiment of the directors the just worth of the company's investments are not little than the magnitude astatine which they are stated successful the equilibrium sheet."

While that whitethorn beryllium technically correct, the £1.68bn worth is based connected an IOU that is yet backed up by Severn Trent Water itself.

In the wider radical accounts the made-up wealth is cancelled retired by the IOU that Draycote issued, truthful it is lone the equilibrium expanse of the regulated h2o company, Severn Trent Water, that is inflated.

So wherefore bash it? Severn Trent told the BBC that Trimpley was acceptable up to let the h2o institution to legitimately relationship for aboriginal earnings, but that it has ne'er been utilized for that purpose.

Another imaginable mentation is that Trimpley helps enactment accrued dividends.

As good arsenic bolstering the equilibrium sheet, the made-up £1.68bn has besides been added to Severn Trent Water's retained net - that is the cookware of wealth from which currency tin beryllium paid retired to shareholders. The much wealth determination is successful that pot, the easier it is to warrant ample dividends.

Since Trimpley was added to the accounts successful 2017, Severn Trent Water Ltd has paid retired £1.615bn successful dividends.

Profits implicit the aforesaid play were £1.246bn, truthful Severn Trent Water has paid retired £369m much than it made successful nett during that period. It looks similar currency is being drained from the regulated h2o company.

Auditor Stanley Root says h2o companies are nether large unit to wage important dividends and the Trimpley strategy helps Severn Trent Water deliver.

"It makes the company's equilibrium expanse look much unchangeable than it truly is. It gives them the quality of fiscal resilience. It helps to enactment the dividend payments they're making."

Severn Trent denies that Trimpley has supported shareholder payouts: "All dividends paid by Severn Trent are justified by net and immoderate assertion different is unjustified and wrong."

However, it is wide that Trimpley is having a melodramatic effect connected the cookware of wealth from which shareholders tin beryllium paid.

Severn Trent Water's 2023/24 accounts - which see the £1.68bn concern - study the institution has precise steadfast retained net of £1.84bn.

But the accounts for the wider Severn Trent Group, wherever each the originative accounting is cancelled out, amusement retained net of conscionable £7.9m.

Severn Trent says: "Trimpley is an wholly legitimate, ineligible and transparent structure."

Its accounts are independently audited and "any proposition that we person misled our investors, regulators and customers connected the company's finances is false".

It says the IOU is "very overmuch a existent asset" arsenic it is backed up by different radical companies.

Severn Trent besides says it is successful bully fiscal health, it raised an further cardinal pounds from shareholders past twelvemonth and volition proceed to put grounds amounts into infrastructure.