Severn Trent Water is alleged to be employing an accounting maneuver to inflate its balance sheet by over £1 billion.
BBC Panorama reported that the water utility asserts an investment said to be valued at £1,680,000,000 actually holds no genuine worth.
Nevertheless, this fabricated cash presents a stronger financial front, enhancing returns for shareholders.
The water utility serves over eight million residents across central England and mid-Wales and is part of various entities within the Severn Trent plc conglomerate.
It has consistently received the top four-star rating for environmental performance from the Environment Agency for an unprecedented five consecutive years.
The parent company, Severn Trent, has also distributed substantial dividends to shareholders during this duration.
However, a segment of its customer base is dissatisfied.
The advocacy group Up Sewage Creek is urging that a larger portion of the company’s profits be directed towards tackling pollution in waterways.
‘They haven’t modernized the infrastructure; they’ve utilized our funds to benefit themselves and their shareholders,’ a representative from the campaign stated to the BBC.
The accounting strategy was initiated in March 2017 with the establishment of a shell corporation, devoid of money or assets, named Severn Trent Trimpley, as part of the group.
Another Severn Trent entity known as Severn Trent Draycote – the parent of the water utility – agreed to acquire Trimpley for £2.
Trimpley subsequently issued additional shares, and Draycote purchased them for £3,000,000,000.
However, no real cash transitioned since Draycote compensated Trimpley with a loan note – essentially an IOU.
On paper, Trimpley appeared to be valued at £3,000,000,000 immediately due to the IOU.
Severn Trent Water then claimed 49% ownership of Trimpley – and this investment was represented in the water company’s financial statements at £1,470,000,000.
Panorama uncovered the Trimpley investment through the investigation by retired auditor Stanley Root.
He remarked on the program: ‘I believe it misleads the public to think that the net assets of Severn Trent Water Limited are greater than they are, suggesting that the company is in a more advantageous position than reality dictates.
‘Thus, the balance sheet and the financial reports are deceptive.’
Since 2017, the fictitious funds have appreciated in value due to accrued interest.
It was appraised at £1,680,000,000 in the Ofwat regulated water company’s 2023/24 financial statements, which were audited and authorized by the directors of Severn Trent Water.
Severn Trent explained to the BBC that Trimpley was established to enable the water utility to appropriately account for anticipated earnings, but it has not been utilized for that aim.
Nonetheless, it has been suggested that Trimpley aids in sustaining elevated dividends.
Since its inclusion in the accounts in 2017, Severn Trent Water Ltd has distributed £1,615,000,000 in dividends. Over the same timeframe, profits totaled £1,246,000,000, resulting in Severn Trent Water distributing £369,000,000 more than it earned in profit.
Severn Trent refutes claims that Trimpley has underpinned dividend payouts.
The firm stated: ‘All dividends issued by Severn Trent are substantiated by earnings, and any claim to the contrary is unjust and incorrect,’ describing Trimpley as ‘an entirely valid, lawful, and transparent framework.’
Its financial statements undergo independent audits, and ‘any notion that we have misled our investors, regulators, and consumers regarding the company’s financial situation is unfounded.’ The IOU is ‘a genuine asset,’ supported by other companies within the group.
Severn Trent also asserts it maintains solid financial stability, having secured an extra £1,000,000,000 from shareholders last year, and it intends to keep investing record sums into its infrastructure.
An Ofwat spokesperson mentioned: ‘There has been no report or indication of any regulated company actions being in breach of regulatory duties.’
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