Water firm uses ‘made-up money’ to boost balance sheet by nearly £1,700,000,000

Severn Trent Water is reportedly using an accounting trick to boost its balance sheet by more than £1 billion.

BBC Panorama said the water company claimed an investment it said is worth £1,680,000,000 has no real value.

However, the cash makes it look more financially robust, boosting shareholder payouts.

The water company has more than eight million people across central England and mid-Wales and is part of several firms in the Severn Trent plc group.

It has been awarded the Environment Agency’s top four-star rating for environmental performance for a record five consecutive years.

Parent company Severn Trent has also paid large dividends to shareholders during this time.

But some of its customers are unhappy.

Campaign group Up Sewage Creek wants more of the company’s earnings to be used to combat pollution in rivers.

‘They’ve not updated the infrastructure, they’ve used our money to enrich themselves and enrich their shareholders,’ one of the campaigners told the BBC.

The accounting trick started in March 2017 when a shell company, with no money or assets, called Severn Trent Trimpley was set up as part of the group.

Another Severn Trent company called Severn Trent Draycote – which owns the water company – agreed to buy Trimpley for £2.

Trimpley then issued additional shares and Draycote bought them for £3,000,000,000.

However, no money actually changed hands because Draycote paid Trimpley with a loan note – effectively an IOU.

But, on paper, Trimpley immediately appeared to be worth £3,000,000,000 because it had the IOU.

Severn Trent Water then acquired 49% of Trimpley – and that investment was valued in the water company’s accounts at £1,470,000,000.

Panorama discovered the Trimpley investment through the work of retired auditor Stanley Root.

He told the programme: ‘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 made-up money has grown in value because of interest payments.

It was valued at £1,680,000,000 in the Ofwat regulated water company’s 2023/24 accounts which were audited and signed off by Severn Trent Water’s directors.

Severn Trent told the BBC that Trimpley was set up to allow the water company to legitimately account for future earnings, but that it has never been used for that purpose.

However, it has been claimed that Trimpley helps support increased dividends.

Since it was added to the accounts in 2017, Severn Trent Water Ltd has paid out £1,615,000,000 in dividends. Profits over the same period were £1,246,000,000, so Severn Trent Water has paid out £369,000,000 more than it made in profit.

Severn Trent denies that Trimpley has supported shareholder payouts.

It said: ‘All dividends paid by Severn Trent are justified by earnings and any assertion otherwise is unjustified and wrong’ and described Trimpley as ‘an entirely 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’. The IOU is ‘very much a real asset’ as it is backed up by other group companies.

Severn Trent also says it is in good financial health, it raised an additional £1,000,000,000 from shareholders last year and will continue to invest record amounts into infrastructure.

An Ofwat spokesperson said: ‘There has been no reporting or suggestion of any regulated company activities being in breach of regulatory obligations.’

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